FINANCIAL MARKETS

THEORY: Select the best possible answer by making solid 10.When the market risk premium rises, stock prices will
marks on your answer sheet that fit the response ________.
completely. STRICTLY NO ERASURES A) rise
B) fall
1..A mutual fund which attempts to hold quantities of C) recover
shares in proportion to their representation in D) have excess volatility
the market is called a __________ fund. 11.An important characteristic of market efficiency is
A) stock that _________________.
B) index A) there are no arbitrage opportunities
C) hedge B) security prices react quickly to new
D) money market information
2.Research has revealed that regardless of what the C) Active trading strategies will not
current estimate of a firm's beta is, it will tend to consistently outperform passive strategies
move closer to ______ over time. D) all of the above
A) 1 12.A rule for buying or selling stocks according to recent
B) 0 price movements is called __________.
C) -1 A) a filter rule
D) None of the above B) a market anomaly
3.Which of the following beliefs would not preclude C) an enigma
charting as a method of portfolio management. D) none of the above
A) The market is strong form efficient. 13.__________ is not a true statement regarding the
B) The market is semi-strong form efficient. capital market line.
C) The market is weak form efficient. A) The capital market line always has a positive
D) Stock prices follow recurring patterns. slope
4.In the context of the capital asset pricing model, the B) The capital market line is also called the
systematic measure of risk is __________. security market line
A) unique risk C) The capital market line is the best attainable
B) beta capital allocation line
C) standard deviation of returns D) The capital market line is the line from the
D) variance of returns risk-free rate through the market portfolio
5.The small firm in January effect is strongest ________. 14.When stock returns exhibit positive serial correlation,
A) early in the month this means that __________ returns tend to
B) in the middle of the month follow ___________ returns.
C) late in the month A) positive; positive
D) in even numbered years. B) positive ; negative
6.Building a zero-investment portfolio will always involve C) negative; positive
_____________ D) None of the above
A) a mixture of short and long positions
B) only short positions 15. A big increase in government spending is an
C) only long positions example of __________.
D) Any of the above answers could be correct A) a demand shock
7.The expected return of the risky asset portfolio with B) a supply shock
minimum variance is __________. C) an unsurprising shock
A) the market rate of return D) none of the above
B) zero
C) the risk-free rate
D) There is not enough information to answer 16. The degree of operating leverage (DOL)
this question measures the ___________________.
8.According to capital asset pricing theory, the key A) sensitivity of profits to changes in sales
determinant of portfolio returns is __________. revenues
A) the degree of diversification B) sensitivity of profits to changes in fixed
B) the systematic risk of the portfolio costs
C) the firm specific risk of the portfolio C) sensitivity of profits to changes in the tax
D) economic factors rate
9.If studies suggest that domestic securities markets are D) sensitivity of profits to changes in
efficient at the semi-strong level this implies that interest rates
all foreign securities markets are efficient at the
_____________ level. 17. If economic conditions are such that very slow
A) weak growth is expected in the foreseeable future,
B) semi-strong one would want to invest in industries with
C) strong __________ sensitivity to economic conditions.
D) None of the above answers are correct A) below average
FINANCIAL MARKETS

B) average medium of exchange is any object that is generally

C) above average accepted in exchange for goods and services. Statement
D) since growth is expected to be slow, 3. Money as a store of value can be held and exchanged
sensitivity to economic conditions is not later for goods and services.
an issue [A] Statement 1 only.
[B] Statement 2 only.
18. __________ probably the most direct way to [C] Statement 3 only.
stimulate or slow the economy. [D] All of the above.
A) Fiscal policy is [E] None of the above.
B) Monetary policy is
C) Supply-side policy is 25.Assuming an economy is operating at full
D) None of the above are employment, which of the following is least likely to
contribute to demand-pull inflation? An increase in
19. An analyst starts by examining the broad [A] Quantity of money.
economic environment and then considers the [B] Government purchases.
implications of the outside environment on the [C] Government borrowings.
industry in which the firm operates. Finally, the [D] All of the above.
firm's position within the industry is examined. [E] None of the above.
This is called __________ analysis.
A) bottom-up 26.If the inflation rate is greater than anticipated, are
B) outside-inside workers and lenders most likely to gain or lose relative to
C) top-down employers and borrowers, respectively?
D) upside-down [A] Workers and lenders will both lose.
[B] Workers will gain, but lenders will lose.
20. If monetary authority wants to slow the growth of an [C] Workers will lose, but lenders will gain.
economy, its least appropriate action will be to increase [D] Workers and lenders will both gain.
[A] Reserve requirements. [E] Answer is not given.
[B] The national funds rate.
[C] Purchases of government securities. 27.If the national reserve increases the money supply,
[D] All of the above. the least likely short-run effect is a decrease in
[E] None of the above. [A] Interest rates.
[B] Imported goods.
21. What is the most likely effect of financial innovation [C] Investment spending.
and increasing real GDP, respectively, on the demand of [D] All of the above.
money? [E] None of the above.
[A] Increase Financial Innovation; Increase Increasing
Real GDP. 28.Which of the following is least likely a characteristic of
[B] Increase Financial Innovation; Decrease perfect competition?
Increasing Real GDP. [A] A large number of buyers and sellers.
[C] Decrease Financial Innovation; Increase [B] Firms produce differentiated products.
Increasing Real GDP. [C] Ease of entry into and exit from the market.
[D] All of the above. [D] All of the above.
[E] None of the above. [E] None of the above.

22.If the national reserve increases the money supply, 29.In a perfectly competitive market, the individual
the least likely short-run effect is a decrease in firm’s demand curve is most likely
[A] Interest rates. [A] Vertical.
[B] Imported goods. [B] Horizontal.
[C] Investment spending. [C] Upward sloping.
[D] All of the above. [D] All of the above.
[E] None of the above. [E] None of the above.

23.The following are the functions of money, except: 30.Which of the following is not a constraint that helps
[A] Means of payment. to create a monopoly?
[B] Medium of exchange. [A] Public franchise.
[C] Store of value. [B] Innovative culture.
[D] Unit of account. [C] Economies of scale along the entire long-run
[E] None of the above. average cost curve.
[D] All of the above.
24. Which of the following statements is not correct? [E] None of the above.
Statement 1. A unit of account is an agreed measure for
stating the prices of goods and services. Statement 2. A 31.Which of the following is the best reason for price
FINANCIAL MARKETS
discrimination?
[A] Differences in applicable tariffs.
[B] Differences in consumers’ willingness to pay.
[C] Differences in production and/or transportation
costs.
[D] All of the above.
[E] None of the above.
32.A monopoly’s equilibrium level of output is least likely
to occur where
[A] Demand is elastic.
[B] Demand is inelastic.
[C] Marginal revenue equals marginal cost.
[D] All of the above.
[E] None of the above.
33.Compared to perfect competition, a natural
monopoly will most likely be associated with a decrease
in
[A] Deadweight loss.
[B] Producer surplus.
[C] Consumer surplus.
[D] All of the above.
[E] None of the above.
34.Which of the following statements is most correct?
Price discrimination
[A] Increase consumer surplus.
[B] Reduces the monopolist’s economic profits.
[C] Allows different prices to be charged to different
buyers.
[D] All of the above.
[E] None of the above.
35.Compared with outcomes that results from collusion,
independent action by companies operating in an
oligopolistic industry would tend to increase
[A] Output but not prices.
[B] Prices but not output.
[C] Both output and prices.
[D] Neither output nor input.
[E] None of the above.
36. The motivation of trade includes all of the following
except:
A. To increase output due to specialization
B. To be able to import goods which are
cheaper than you can make yourself
C. To be able to consume beyond your
production possibilities
D. To reduce your consumption possibilities
37. If a country is completely self-reliant in producing
goods for its own consumption needs, and has free trade
policies otherwise, Then:
A. It is consuming more than it could trade
B. Its comparative advantage won’t matter
C. It must not have a comparative advantage
D. It could achieve more societal welfare by
trading
38. When one country produces a given amount of a
good using fewer inputs than another country:
A. It has an absolute advantage in producing the
good
B. It has a comparative advantage in producing
the good
C. Specialization and trade will increase
worldwide welfare
D. All of the above
39. To say that a country has a comparative advantage in
the production of wine is to say that:
A. It can produce wine with fewer resources than
any other country can
B. Its opportunity cost of producing wine is
greater than any other country’s
C. Its opportunity cost of producing wine is lower
than any other country’s
D. The relative price of wine is higher in that
country than in any other.
40. A country will trade if:
A. The terms of the trade are rising
B. The terms of the trade are falling
C. It has a comparative advantage in a good
relative to another country
D. Its production possibilities are limited
41. The following are disadvantages of a wire transfer
except:
A. Impossible to stop payment after execution
B. Funds can be hard to recover if payment goes
astray
C. Easy to trace movement of funds from bank to
bank
D. Intermediary banks deduct charges from the
proceeds
42. Fastest way for beneficiary to receive good funds
A. Foreign checks
B. Commercial Letters of Credit
C. Documentary Collections
D. Wire transfer
43. Foreign bank risk can be eliminated via confirmation
of a bank in beneficiary’s country is a feature of
A. Standby Letters of Credit
B. Wire transfer
C. Commercial letters of credit
D. Documentary collections
44. All of the following are features of foreign checks
except:
A. Same convenience and security as domestic
wires
B. Uses account relationships with foreign
correspondent banks
C. Paper instrument that must be sent to
beneficiary and is payable in beneficiary’s country
D. Available in U.S. dollars and major foreign
currencies
45. No protection against order cancellation is an evident
disadvantage of:
A. Documentary Collections
B. Commercial letters of credit
C. Foreign checks
D. Standby letters of credit
FINANCIAL MARKETS
46. Statement I: Draft is a written order by one party
directing a second party to pay a third party.
Statement II: Time Drafts demands payment after a
specified time or on a certain date after the buyer
accepts the draft and receives the goods.
A. First statement is true
B. Second Statement is true
C. Both statement are true
D. Both Statements are false.
47. Which of the following are concerns of international
business-related functions?
A. international financial market
B. Exchange rate and exposure
C. Balance of payments
D. All of the above
48. Statement I: International Financial Management
involves managing working capital, financing the
business, assessing control of Forex and political risks
and evaluating foreign direct investment.
Statement II: Financial managers throughout the
MNC have a single goal of maximizing the value of the
entire MNC, not just their own respective responsibility
units.
A. First statement is true
B. Second statement is true
C. Both statements are true
D. Both statements are false
49. Each country has its own set of rules like those
related to construction of PPE, disposal of production
waste materials and pollution is a feature of
A. Regulatory constraint
B. Ethical constraints
C. Environmental constraints
D. Financial constraint
50. It is the ability of a party to produce a particular good
or service at a lower opportunity costs
A. Comparative advantage
B. Imperfect market theories
C. Product cycle theories
D. information theory
51. A firm’s foreign business diminishes or expands over
time depending on how successful it is at maintaining
some advantage over its competitor is a feature of:
A. Theory of comparative advantage
B. Imperfect Markets theory
C. Product cycle theory
D. Information theory
52. The following are the reasons for going global except:
A. To broaden the market
B. To Diversify
C. To seek new technology
D. To limit investments
53. Goals of cash management in an international
financial management Decision:
Statement I: To speed up collections, slow down
disbursements and thus maximize net float
Statement II: To maximize the risk adjusted, after tax rate
of return on temporary cash balances
A. Statement one is false
B. Statement two is false
C. Both statements are false
D. Both statements are true
54. Factors that contributes to the growth of
international trade
A. Industrialization
B. Advances transportation
C. Globalization
D. all of the above
55. It is a practice used by different companies to reduce
costs by transferring portions of work to outside
suppliers rather than completing it internally.
A. Globalization
B. Supply Chain management
C. Outsourcing
D. Industrialization
56. Method of financing international trade that makes
exporters and importers to exchange goods and services
without necessarily having to use money as a medium of
exchange.
A. Countertrade
B. Buyer credit
C. Confirming
D. Export factoring
57. The following are countertrade strategies except:
A. Defensive
B. Passive
C. progressive
D. Proactive
58. This involves an agreement in which an exporter of
physical capital agrees to accept payment in the form of
the output of a plant that the exporter helps to construct
and equip in a foreign country.
A. Counter purchases
B. Buybacks
C. Offsets
D. Compensatory trade
59. The following are disadvantages of international
market except:
A. takes a long time to integrate all markets
together
B. Too many offshore bank accounts
C. strengthening contagion effect
D. Improves spillover effects
60. The following are the benefits of money market
instruments over other investments except:
A. It deals with much lower funds and players
are small financial institutions
B. Money market enables rapid and relatively
inexpensive acquisition of cash to cover a short-term
liability
C. It is the safest financial market available and is
commonly used by big institutions, corporations and
government
D. Governed by international monetary
transactions between various currency
-End of Exam-
FINANCIAL MARKETS