Certified Financial Management Specialist
(CFMS) Exam Study Guide Questions and
Answers
Question 1
Which of the following statements best describes what you should expect if you
randomly select stocks and add them to your portfolio?
a. Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable,
risk.
b. Adding more such stocks will increase the portfolio's expected rate of return.
c. Adding more such stocks will reduce the portfolio's beta coefficient and thus its
systematic risk.
d. Adding more such stocks will have no effect on the portfolio's risk.
e. Adding more such stocks will reduce the portfolio's market risk but not its
unsystematic risk.
Correct Answer
a. Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable,
risk.
Question 2
In a sole proprietorship, the owner is personally responsible without limitation for the
liabilities incurred.
a. True
b. False
Correct Answer
a. True
Question 3
What is market timing in investment strategy?
Correct Answer
Market timing is an asset allocation strategy that involves predicting market
bubbles and crashes to maximize returns, which is difficult to achieve accurately.
Page 1 of 182
,Question 4
The Bottom Line
Correct Answer
Interest rates influence stocks, bond interest rates, consumer and business
spending, inflation, and recessions.
Question 5
What is the relationship between debt management ratios and risk?
Correct Answer
Debt management ratios indicate how risky the firm is and its obligations to
bondholders.
Question 6
What is the primary purpose of banks historically?
Correct Answer
To provide security for customers' money.
Question 7
Staple Financing
Correct Answer
At times, the investment bank involved in the sale of one company might offer
financing to the buying company.and is done to produce larger and timely bids
Question 8
Competitors
Correct Answer
Firms in the same sector for comparison purposes.
Page 2 of 182
,Question 9
How does behavioral finance differ from EMH?
Correct Answer
Behavioral finance suggests that markets are not fully efficient and that
psychological and social factors influence buying and selling decisions.
Question 10
Physical Location Stock Exchanges
Correct Answer
Formal organizations with tangible trading locations.
Question 11
What is liquidity risk?
Correct Answer
The risk that a bank cannot pay back its liabilities in a timely manner due to
unexpected claims.
Question 12
Exchange Rates
Correct Answer
The exchange rates between domestic and foreign currencies can be affected by
monetary policy. With an increase in the money supply, the domestic currency
becomes cheaper than its foreign exchange
Page 3 of 182
, Question 13
Assume that the current corporate bond yield curve is upward sloping. Under this
condition, then we could be sure that
a. Inflation is expected to decline in the future.
b. The economy is not in a recession.
c. Long-term bonds are a better buy than short-term bonds.
d. Maturity risk premiums could help to explain the yield curve's upward slope.
e. Long-term interest rates are more volatile than short-term rates.
Correct Answer
d. Maturity risk premiums could help to explain the yield curve's upward slope.
Question 14
Humped Yield Curve
Correct Answer
a yield curve where interest rates on intermediate-term maturities are higher than
rates on both short- and long-term maturities.
Question 15
How a Dividend Policy Works
Correct Answer
Some companies choose to reward their common stock shareholders by paying
them a dividend. A dividend is paid on a regular basis and usually represents a
portion of the profits that these companies earn.
Question 16
The longer the firm;s accounts payable period, the:
a. longer the firm's cash conversion cycle is
b. shorter the firm;s inventory period is
c. more the delay in the accounts receivable period
d. less the firm must invest in working capital
Correct Answer
d. less the firm must invest in working capital
Page 4 of 182
(CFMS) Exam Study Guide Questions and
Answers
Question 1
Which of the following statements best describes what you should expect if you
randomly select stocks and add them to your portfolio?
a. Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable,
risk.
b. Adding more such stocks will increase the portfolio's expected rate of return.
c. Adding more such stocks will reduce the portfolio's beta coefficient and thus its
systematic risk.
d. Adding more such stocks will have no effect on the portfolio's risk.
e. Adding more such stocks will reduce the portfolio's market risk but not its
unsystematic risk.
Correct Answer
a. Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable,
risk.
Question 2
In a sole proprietorship, the owner is personally responsible without limitation for the
liabilities incurred.
a. True
b. False
Correct Answer
a. True
Question 3
What is market timing in investment strategy?
Correct Answer
Market timing is an asset allocation strategy that involves predicting market
bubbles and crashes to maximize returns, which is difficult to achieve accurately.
Page 1 of 182
,Question 4
The Bottom Line
Correct Answer
Interest rates influence stocks, bond interest rates, consumer and business
spending, inflation, and recessions.
Question 5
What is the relationship between debt management ratios and risk?
Correct Answer
Debt management ratios indicate how risky the firm is and its obligations to
bondholders.
Question 6
What is the primary purpose of banks historically?
Correct Answer
To provide security for customers' money.
Question 7
Staple Financing
Correct Answer
At times, the investment bank involved in the sale of one company might offer
financing to the buying company.and is done to produce larger and timely bids
Question 8
Competitors
Correct Answer
Firms in the same sector for comparison purposes.
Page 2 of 182
,Question 9
How does behavioral finance differ from EMH?
Correct Answer
Behavioral finance suggests that markets are not fully efficient and that
psychological and social factors influence buying and selling decisions.
Question 10
Physical Location Stock Exchanges
Correct Answer
Formal organizations with tangible trading locations.
Question 11
What is liquidity risk?
Correct Answer
The risk that a bank cannot pay back its liabilities in a timely manner due to
unexpected claims.
Question 12
Exchange Rates
Correct Answer
The exchange rates between domestic and foreign currencies can be affected by
monetary policy. With an increase in the money supply, the domestic currency
becomes cheaper than its foreign exchange
Page 3 of 182
, Question 13
Assume that the current corporate bond yield curve is upward sloping. Under this
condition, then we could be sure that
a. Inflation is expected to decline in the future.
b. The economy is not in a recession.
c. Long-term bonds are a better buy than short-term bonds.
d. Maturity risk premiums could help to explain the yield curve's upward slope.
e. Long-term interest rates are more volatile than short-term rates.
Correct Answer
d. Maturity risk premiums could help to explain the yield curve's upward slope.
Question 14
Humped Yield Curve
Correct Answer
a yield curve where interest rates on intermediate-term maturities are higher than
rates on both short- and long-term maturities.
Question 15
How a Dividend Policy Works
Correct Answer
Some companies choose to reward their common stock shareholders by paying
them a dividend. A dividend is paid on a regular basis and usually represents a
portion of the profits that these companies earn.
Question 16
The longer the firm;s accounts payable period, the:
a. longer the firm's cash conversion cycle is
b. shorter the firm;s inventory period is
c. more the delay in the accounts receivable period
d. less the firm must invest in working capital
Correct Answer
d. less the firm must invest in working capital
Page 4 of 182
