Module 12 - Investment Management And Corporate Finance

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Module 12 - Investment Management And Corporate Finance - Quiz


Questions and Answers
  • 1. 

    Which of the following BEST describes the Strategic Asset Allocation Strategy?

    • A.

      The most comprehensive strategy that requires a constant examination of the investor’s needs and circumstances as well as changes in the capital market and this is reflected by continuous rebalancing of the portfolio

    • B.

      The strategy where the investment decision i.e. to reduce or increase exposure in risky or non-risky asset is dependent on the difference between portfolio value and the predetermined floor value of the portfolio

    • C.

      The strategy where the weight of each asset in the portfolio is fixed and periodically rebalanced to maintain the weight, taking into consideration the changes in the value of the assets

    • D.

      The strategy which focuses on changes in the capital market conditions and attempts to take advantage of perceived mispricing of securities

    Correct Answer
    C. The strategy where the weight of each asset in the portfolio is fixed and periodically rebalanced to maintain the weight, taking into consideration the changes in the value of the assets
    Explanation
    This answer describes the Strategic Asset Allocation Strategy as one where the weight of each asset in the portfolio is fixed and periodically rebalanced to maintain the weight, while considering changes in the value of the assets. This means that the strategy aims to maintain a specific allocation of assets in the portfolio, but adjusts this allocation over time to account for changes in the value of the assets. This approach helps to ensure that the portfolio remains aligned with the investor's desired asset allocation and risk tolerance.

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  • 2. 

    All of the following statements about features of swap contracts are TRUE, EXCEPT:

    • A.

      Swap contracts are multi-period agreement

    • B.

      Swap contracts are highly standardised and negotiated over the counter

    • C.

      Swap contracts are mainly used by institutional managers, corporations, banks and public sector institutions

    • D.

      Swap contracts have high default risk as there is no clearing house to ensure performance of the counterparty

    Correct Answer
    B. Swap contracts are highly standardised and negotiated over the counter
    Explanation
    Swap contracts are highly standardised and negotiated over the counter.

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  • 3. 

    The market value of goods and services produced over a period of time within a country is known as:

    • A.

      Gross national product

    • B.

      Gross domestic product

    • C.

      National productivity

    • D.

      Total domestic productivity

    Correct Answer
    B. Gross domestic product
    Explanation
    Gross domestic product (GDP) is the correct answer because it represents the total market value of all goods and services produced within a country's borders over a specific time period. It is a measure of the country's economic output and is used to assess the overall health and growth of the economy. Gross national product (GNP) would include the market value of goods and services produced by a country's residents, both domestically and abroad, whereas GDP only includes domestic production. National productivity and total domestic productivity are not accurate terms to describe the market value of goods and services produced within a country.

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  • 4. 

    The statutory requirements that lay down the responsibilities of directors for preparation of a company’s financial statements are under the purview of which of the following authorities?

    • A.

      Securities Commission Malaysia

    • B.

      Bank Negara Malaysia

    • C.

      Bursa Malaysia Securities Berhad

    • D.

      Companies Commission of Malaysia

    Correct Answer
    D. Companies Commission of Malaysia
    Explanation
    The correct answer is Companies Commission of Malaysia. The Companies Commission of Malaysia is responsible for ensuring compliance with the Companies Act 2016, which includes the statutory requirements for the preparation of a company's financial statements. This authority oversees the registration and regulation of companies in Malaysia and sets guidelines for financial reporting and disclosure.

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  • 5. 

    When a company decides to be the lowest cost producer in the industry to compete in the market, it is said to be pursuing a:

    • A.

      Cost cutting strategy

    • B.

      Cost leadership strategy

    • C.

      Cost optimisation strategy

    • D.

      Cost competitiveness strategy

    Correct Answer
    B. Cost leadership strategy
    Explanation
    A company that decides to be the lowest cost producer in the industry is pursuing a cost leadership strategy. This means that the company aims to offer its products or services at the lowest possible cost compared to its competitors. By doing so, the company can attract price-sensitive customers and gain a competitive advantage in the market. This strategy involves implementing cost-cutting measures, streamlining operations, and finding ways to reduce expenses without compromising on quality. Ultimately, the goal is to achieve a strong market position by being the cost leader in the industry.

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  • 6. 

    The duration of a straight bond will usually have a positive relationship with the:

    • A.

      Coupon rate of the bond

    • B.

      Yield to maturity of the bond

    • C.

      Time to maturity of the bond

    • D.

      Prevailing risk-free rate of interest

    Correct Answer
    C. Time to maturity of the bond
    Explanation
    The duration of a straight bond refers to the sensitivity of the bond's price to changes in interest rates. As time to maturity increases, the duration of the bond also increases. This is because the longer the bond's time to maturity, the more sensitive it is to changes in interest rates. Therefore, there is a positive relationship between the duration of a bond and its time to maturity.

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  • 7. 

    The holder of a European put option may exercise the option under which of the following circumstances?

    • A.

      As and when the value of the underlying exceeds the strike price

    • B.

      As and when the value of the underlying is less than the strike price

    • C.

      When the value of the underlying exceeds the strike price upon expiry

    • D.

      When the value of the underlying is less than the strike price upon expiry

    Correct Answer
    D. When the value of the underlying is less than the strike price upon expiry
    Explanation
    The holder of a European put option has the right to sell the underlying asset at the strike price upon expiry. Therefore, they would exercise the option when the value of the underlying is less than the strike price upon expiry. This allows them to sell the asset at a higher price than its current market value, resulting in a profit.

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  • 8. 

    Which of the following should be the primary determining factor for a company to undertake corporate restructuring exercise?

    • A.

      To create value for shareholders of the company

    • B.

      To manage the company’s share price from declining

    • C.

      To prevent from an unwanted takeover by business competitors

    • D.

      To increase the company’s current earnings per share regardless of cash flow implication

    Correct Answer
    A. To create value for shareholders of the company
    Explanation
    The primary determining factor for a company to undertake a corporate restructuring exercise should be to create value for shareholders of the company. This means that the company should focus on making changes and adjustments that will ultimately benefit the shareholders by increasing the value of their investments. By prioritizing the creation of value for shareholders, the company can ensure that its restructuring efforts are aligned with the goal of maximizing shareholder wealth.

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  • 9. 

    Which of the following is a measure of the degree to which 2 variable moves together relative to their individual mean values over time?

    • A.

      Variance

    • B.

      Covariance

    • C.

      Semi-variance

    • D.

      Standard deviation

    Correct Answer
    B. Covariance
    Explanation
    Covariance is a measure of the degree to which two variables move together relative to their individual mean values over time. It indicates the direction and strength of the relationship between the variables. A positive covariance suggests that the variables move in the same direction, while a negative covariance indicates they move in opposite directions. Covariance is used to understand the relationship between variables and is commonly used in finance and statistics.

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  • 10. 

    A central bank can use several methods to achieve its monetary policy objectives including: (i) control of money supply by controlling the borrowing and lending  activities of banks(ii) control of liquidity in the banking system by selling government securities to the public(iii) control of liquidity by controlling the statutory reserve requirements (SRR) of banks(iv) require the government to deposit excess funds with central bank rather than private sector

    • A.

      (ii) and (iii) only

    • B.

      (i), (ii) and (iv) only

    • C.

      (i), (iii) and (iv) only

    • D.

      All of the above

    Correct Answer
    D. All of the above
    Explanation
    The correct answer is "All of the above". This means that a central bank can use all of the methods mentioned (i.e., controlling money supply, controlling liquidity in the banking system, controlling statutory reserve requirements, and requiring the government to deposit excess funds) to achieve its monetary policy objectives.

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  • 11. 

    What would be the theoretical impact on the rising domestic interest rates on the following? (Assuming other factors remain constant)  Bond PricesEquity PricesExchange rates for domestic currencyADecreaseDecreaseIncreaseBIncreaseDecreaseDecreaseCDecreaseIncreaseDecreaseDDecreaseIncreaseIncrease

    • A.

      A

    • B.

      B

    • C.

      C

    • D.

      D

    Correct Answer
    A. A
    Explanation
    An increase in domestic interest rates would lead to a decrease in bond prices. This is because when interest rates rise, the yield on newly issued bonds increases, making existing bonds with lower yields less attractive to investors. As a result, the demand for existing bonds decreases, causing their prices to fall.

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  • 12. 

    Which of the following describes an appropriate use of the weighted average cost of capital (WACC)?

    • A.

      To determine the expected rate of return of a potential project

    • B.

      To determine the weightage of assets in the capital structure of a company

    • C.

      To determine the amount a company should retain from its earnings and the dividend payout

    • D.

      To determine the hurdle rate for decisions related to acceptance or rejection of a project

    Correct Answer
    D. To determine the hurdle rate for decisions related to acceptance or rejection of a project
    Explanation
    The weighted average cost of capital (WACC) is used to determine the hurdle rate for decisions related to the acceptance or rejection of a project. The hurdle rate represents the minimum rate of return that a project must achieve in order to be considered acceptable. By calculating the WACC, which takes into account the cost of both debt and equity financing, a company can determine the rate of return that is required to meet its capital costs. This allows management to evaluate whether a potential project is financially viable and should be pursued.

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  • 13. 

    Which of the following statements BEST describes the relationship between gross national product (GNP) and money supply (assuming other factors remain constant)?

    • A.

      As nominal GNP increases, money supply increases

    • B.

      As nominal GNP increases, money supply decreases

    • C.

      As nominal GNP increases, money supply remain unchanged

    • D.

      As nominal GNP remain unchanged, money supply increases

    Correct Answer
    A. As nominal GNP increases, money supply increases
    Explanation
    The relationship between gross national product (GNP) and money supply is that as nominal GNP increases, money supply increases. This is because as the economy grows and produces more goods and services, there is a greater demand for money to facilitate transactions. Therefore, the central bank increases the money supply to meet this demand.

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  • 14. 

    Which of the following statements BEST describe passive strategy in investment management?

    • A.

      A strategy that focuses on changes in capital market conditions and attempts to take advantage of perceived mispricing in securities

    • B.

      A strategy that concentrates on adding value to the portfolio through careful selection of securities

    • C.

      A strategy that needs a constant rebalancing of the portfolio to achieve the target returns

    • D.

      A strategy where the portfolio is constructed to reflect a benchmark index

    Correct Answer
    D. A strategy where the portfolio is constructed to reflect a benchmark index
    Explanation
    Passive strategy in investment management refers to a strategy where the portfolio is constructed to mirror or replicate a benchmark index. This means that the investment manager does not actively select securities or make frequent changes based on market conditions or perceived mispricing. Instead, they aim to closely match the performance of a specific index by holding similar securities in the same proportions. The objective is to achieve returns that are similar to the benchmark index rather than outperforming it.

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  • 15. 

    Which of the following bond issues should an investor choose if he expects the market interest rate to rise?  DurationAnnual Coupon Payment (%)Bond A610Bond B810Bond C614Bond D814

    • A.

      Bond A

    • B.

      Bond B

    • C.

      Bond C

    • D.

      Bond D

    Correct Answer
    C. Bond C
    Explanation
    An investor should choose Bond C if they expect the market interest rate to rise. This is because Bond C has a shorter duration compared to the other bonds, which means it is less sensitive to changes in interest rates. Therefore, if interest rates rise, the price of Bond C will decline less compared to the other bonds, making it a better choice for the investor.

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  • 16. 

    Which of the following risk(s) will be faced by a company if it decides to raise funds through equity?(i)               Market volatility risk(ii)              Risk of dilution of control and earning per share(iii)             Bankruptcy risk(iv)             Interest rate risk

    • A.

      (i) and (ii) only

    • B.

      (iii) and (iv) only

    • C.

      (i), (ii) and (iii) only

    • D.

      All of the above

    Correct Answer
    A. (i) and (ii) only
    Explanation
    If a company decides to raise funds through equity, it will face the risk of market volatility, which refers to the potential for the stock price to fluctuate due to market conditions. Additionally, there is a risk of dilution of control and earnings per share, as issuing more equity shares can lead to a decrease in the ownership percentage and earnings per share for existing shareholders. Therefore, the correct answer is (i) and (ii) only.

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  • 17. 

    Which of the following conditions would allow a subsidiary to be excluded from being consolidated in group accounts?(i)  When a subsidiary is not wholly-owned(ii) When a subsidiary is partly owned by a government agency(iii) When a subsidiary is acquired and held with a view to its subsequent disposal in the near future(iv) When a subsidiary is operating under severe long-term restrictions which significantly impair its ability to transfer funds to its parent

    • A.

      (i) only

    • B.

      (ii) only

    • C.

      (ii) and (iii) only

    • D.

      (iii) and (iv) only

    Correct Answer
    D. (iii) and (iv) only
    Explanation
    A subsidiary can be excluded from being consolidated in group accounts if it meets either condition (iii) or condition (iv). Condition (iii) states that the subsidiary is acquired and held with the intention of disposing of it in the near future. This means that the subsidiary is not expected to be a long-term part of the group. Condition (iv) states that the subsidiary is operating under severe long-term restrictions that significantly impair its ability to transfer funds to its parent. This means that the subsidiary is not able to contribute financially to the group in a meaningful way.

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  • 18. 

    In a two-asset portfolio, which of the correlation coefficient between the returns of the two assets will provide the maximum benefits from diversification?

    • A.

      – 0.75

    • B.

      – 0.5

    • C.

      0

    • D.

      + 0.5

    Correct Answer
    A. – 0.75
    Explanation
    A correlation coefficient measures the relationship between two variables, in this case, the returns of the two assets in a portfolio. A correlation coefficient of -0.75 indicates a strong negative correlation, meaning that when one asset's return increases, the other asset's return tends to decrease. This negative correlation is beneficial for diversification because it means that when one asset is performing poorly, the other asset is likely performing well, reducing the overall risk of the portfolio. Therefore, a correlation coefficient of -0.75 provides the maximum benefits from diversification.

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  • 19. 

    Amin decided to invest 50% of his portfolio in Share X and the remaining in Share Y. Share X has a beta of 1.0 while Share Y has a beta of 1.2. If the market risk premium was to increase while the risk-free rate remains constant, which of the following would occur?

    • A.

      The required return will increase for Share Y but will decrease for Share X

    • B.

      The required return will increase for Share X but will decrease for Share Y

    • C.

      The required return will decrease by the same amount for both Share X and Share Y

    • D.

      The required return will increase for both Shares but the increase will be greater for Share Y than for Share X

    Correct Answer
    D. The required return will increase for both Shares but the increase will be greater for Share Y than for Share X
    Explanation
    When the market risk premium increases, it means that the overall risk in the market has increased. Share Y, with a higher beta of 1.2, is more sensitive to market movements and therefore carries more risk. As a result, the required return for Share Y will increase more than that of Share X, which has a beta of 1.0. Therefore, the increase in required return will be greater for Share Y than for Share X.

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  • 20. 

    The premium on a call option with a strike price of RM 4.00 is RM 0.80 when the market price of the underlying share is RM 4.20. Compute the option intrinsic value and its time value       Option Intrinsic Value         Time Value    A    RM0.20RM0.80BRM0.80RM0.20CRM0.20RM0.60DRM0.60RM0.20

    • A.

      A

    • B.

      B

    • C.

      C

    • D.

      D

    Correct Answer
    C. C
    Explanation
    The option intrinsic value is the difference between the market price of the underlying share and the strike price of the option. In this case, the market price of the underlying share is RM 4.20 and the strike price of the option is RM 4.00. Therefore, the option intrinsic value is RM 0.20. The time value of the option is the difference between the option premium and the option intrinsic value. In this case, the option premium is RM 0.80 and the option intrinsic value is RM 0.20. Therefore, the time value of the option is RM 0.60.

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  • 21. 

    A portfolio has an average return of 12%. Assuming that the risk-free rate is 7%, the beta of the portfolio is 1.1 and the standard deviation of the portfolio is 14%, what would be the Treynor Index for the portfolio?

    • A.

      0.22

    • B.

      0.36

    • C.

      2.80

    • D.

      4.55

    Correct Answer
    D. 4.55
    Explanation
    The Treynor Index measures the excess return of a portfolio per unit of systematic risk, as measured by beta. It is calculated by subtracting the risk-free rate from the portfolio's average return and dividing the result by the portfolio's beta. In this case, the excess return is 12% - 7% = 5%. Dividing this by the portfolio's beta of 1.1 gives a Treynor Index of 5% / 1.1 = 4.55. This means that for every unit of systematic risk, the portfolio generates an excess return of 4.55%.

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  • 22. 

    Given the following information :-
    • Current price of FBM KLCI = 1650
    • Annual interest rate = 5 %
    • Composite Index annual dividend = Nil
    What is the expected price of FBM KLCI futures with 180 days to maturity?

    • A.

      1732.0

    • B.

      1745.0

    • C.

      1690.0

    • D.

      1568.0

    Correct Answer
    C. 1690.0
    Explanation
    The expected price of FBM KLCI futures with 180 days to maturity can be calculated using the formula: Expected Price = Current Price * (1 + Annual Interest Rate)^(Days to Maturity/365). In this case, the current price is 1650, the annual interest rate is 5%, and the days to maturity is 180. Substituting these values into the formula, we get: Expected Price = 1650 * (1 + 0.05)^(180/365) = 1690.0. Therefore, the expected price of FBM KLCI futures with 180 days to maturity is 1690.0.

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  • 23. 

    Listed Bhd is undertaking a rights issue exercise on the basis of 1 rights share for every 3 existing shares held. The rights subscription price is RM3.00 per share.Based on the current market price of RM3.20 per share, compute the theoretical ex-rights price.

    • A.

      RM2.85

    • B.

      RM3.00

    • C.

      RM3.15

    • D.

      RM3.20

    Correct Answer
    C. RM3.15
    Explanation
    The theoretical ex-rights price is calculated by subtracting the subscription price from the current market price and then dividing by the sum of the existing shares held plus the number of rights shares received. In this case, the calculation would be (3.20 - 3.00) / (3 + 1/3) = 0.20 / 3.33 = 0.06. Subtracting this result from the current market price gives us 3.20 - 0.06 = RM3.14. Rounding up to the nearest cent, the theoretical ex-rights price is RM3.15.

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  • 24. 

    The beta coefficient of Idaman Bhd is 2.5. The yield on Government’s 3-month Treasury Bill is 3%. The expected return on the market portfolio is 8%. Idaman Bhd has paid out a total dividend of 35 sen per share in the most recent financial year.If an investor is willing to purchase the company’s shares at RM4.00, what is the growth rate implicit in the share price?

    • A.

      5.0%

    • B.

      6.2%

    • C.

      7.0%

    • D.

      7.3%

    Correct Answer
    B. 6.2%
    Explanation
    The growth rate implicit in the share price can be calculated using the Gordon Growth Model, which states that the share price is equal to the dividend divided by the difference between the required rate of return and the growth rate. In this case, the dividend is 35 sen per share, the required rate of return is the risk-free rate (3%) plus the beta coefficient (2.5) multiplied by the market risk premium (8% - 3% = 5%), which equals 16.5%. Plugging these values into the Gordon Growth Model, we can solve for the growth rate, which is approximately 6.2%.

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  • 25. 

    A bond has a Macaulay duration of 5.2 years and pays its coupon semiannually. If the yield-to-maturity falls from 7.0% to 5.8%, what will be the percentage of price change of the bond?

    • A.

      + 0.60%

    • B.

      + 5.83%

    • C.

      + 6.03%

    • D.

      + 6.24%

    Correct Answer
    B. + 5.83%
    Explanation
    The percentage of price change of a bond can be calculated using the formula: (Macaulay Duration) * (change in yield-to-maturity) * (-1). In this case, the Macaulay duration is 5.2 years and the change in yield-to-maturity is 7.0% - 5.8% = 1.2%. Plugging these values into the formula, we get: 5.2 * 1.2 * (-1) = -6.24%. However, the answer is given as + 5.83%, which is the positive value of -6.24%. This suggests that the answer provided is incorrect or there may be a mistake in the question itself.

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  • 26. 

    Suppose Evita Bhd’s 9% RM10,000 bond is currently selling at RM9,100 and it has another 13 years remaining to maturity, compute the yield to maturity of the bond using approximate price yield method and decide whether you will purchase the bond if your required rate of return is 12%.

    • A.

      5.1%. No, I will not buy the bond

    • B.

      10.1%. No, I will not buy the bond

    • C.

      13.2%. Yes, I will buy the bond

    • D.

      24.8%. Yes, I will buy the bond

    Correct Answer
    B. 10.1%. No, I will not buy the bond
    Explanation
    The yield to maturity of a bond is the annualized rate of return that an investor will earn if the bond is held until maturity. The approximate price yield method is used to estimate the yield to maturity. In this case, the bond is currently selling at a discount, which means the yield to maturity will be higher than the coupon rate of 9%. By using the approximate price yield method, the yield to maturity is calculated to be 10.1%. Since the required rate of return is 12%, which is higher than the yield to maturity, it is not advisable to purchase the bond.

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  • 27. 

    Which of the following instruments are used in fiscal policy? (i)                Taxation(ii)               Transfer payments(iii)              Reserve requirements(iv)              Government purchases

    • A.

      (i) and (iii) only

    • B.

      (i), (ii) and (iv) only

    • C.

      (ii), (iii) and (iv) only

    • D.

      All of the above

    Correct Answer
    B. (i), (ii) and (iv) only
    Explanation
    Taxation, transfer payments, and government purchases are instruments used in fiscal policy. Taxation refers to the government's ability to collect taxes from individuals and businesses, which can be used to influence the economy. Transfer payments are payments made by the government to individuals or groups, such as welfare or social security benefits. Government purchases refer to the government's spending on goods and services, which can also impact the economy. Reserve requirements, on the other hand, are tools used in monetary policy, not fiscal policy. Therefore, the correct answer is (i), (ii), and (iv) only.

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  • 28. 

    A bond with a put provision would allow an investor to:

    • A.

      Convert the bond to a specified number of ordinary shares

    • B.

      Receive additional interest payments if inflation goes above a specified level

    • C.

      Sell the bond back to the issuer at a pre-determined price at a specified time

    • D.

      Sell the bond back to the issuer at a small premium over par at a specified time period

    Correct Answer
    C. Sell the bond back to the issuer at a pre-determined price at a specified time
    Explanation
    A bond with a put provision allows the investor to sell the bond back to the issuer at a pre-determined price at a specified time. This means that the investor has the option to sell the bond before its maturity date if they choose to do so. This feature provides the investor with some flexibility and a potential exit strategy if they no longer want to hold the bond.

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  • 29. 

    Which of the following dividend theories suggest that investors prefer higher dividend income to future capital gains?

    • A.

      Bird-in Hand Theory

    • B.

      Tax Preference Theory

    • C.

      Residual Dividend Policy

    • D.

      Dividend Irrelevance Theory

    Correct Answer
    A. Bird-in Hand Theory
    Explanation
    The Bird-in Hand Theory suggests that investors prefer higher dividend income to future capital gains. This theory is based on the belief that investors value the certainty and immediate benefit of receiving dividend income over the uncertainty and potential future gains from capital appreciation. According to this theory, investors are more risk-averse and prefer a bird in hand (dividend income) rather than two in the bush (potential capital gains). This theory implies that companies should pay higher dividends to attract investors who prioritize current income over future growth.

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  • 30. 

    A company which undertakes a project with zero net present value (using the company’s cost of capital) will find that the:

    • A.

      Book value of its equity will fall

    • B.

      Market value of its equity will increase

    • C.

      Total value of the company will remain unchanged

    • D.

      Market value of its debt will fall while the value of its equity will increase

    Correct Answer
    C. Total value of the company will remain unchanged
    Explanation
    If a company undertakes a project with zero net present value, it means that the present value of the project's cash inflows is equal to the present value of its cash outflows, resulting in no net gain or loss. In this scenario, the total value of the company will remain unchanged because the project does not generate any additional value for the company. While the market value of equity may increase due to the potential for future cash flows, it is offset by the decrease in the market value of debt. Therefore, the overall value of the company remains the same.

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  • Feb 06, 2024
    Quiz Edited by
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  • Feb 01, 2016
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    Pirloges91
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