Investments – Bodie, Kane & Marcus
(13th Edition) | Accredited Test Bank &
Solutions | All Lessons Included | 2025
Comprehensive Advanced-Level
Multiple-Choice Examination
Target Audience: College students, finance professionals, CFA candidates
Difficulty Level: Advanced / Hard / Mixed
Total Questions: 150
Format: One correct answer per question with detailed rationale
Table of Contents
Section Topic Questions
I The Investment Environment & Asset Classes 1–15
II Risk and Return: Past and Prologue 16–30
III Efficient Diversification & Portfolio Theory 31–50
IV Capital Asset Pricing Model & Index Models 51–65
V Arbitrage Pricing Theory & Multifactor Models 66–75
VI Market Efficiency & Behavioral Finance 76–90
VII Fixed-Income Securities: Prices, Yields & Term Structure 91–110
VIII Equity Valuation Models 111–125
,Section Topic Questions
IX Derivatives: Options, Futures & Swaps 126–140
X Active Portfolio Management & Performance Evaluation 141–150
Section I: The Investment Environment & Asset Classes (Questions 1–15)
🟢 1. Which of the following best describes the primary role of financial intermediaries in the investment
environment?
A. Eliminating all investment risk for retail investors
B. 🔴🔴 Channeling funds from savers to borrowers while providing liquidity and risk transformation
C. Ensuring that all securities trade at their intrinsic value
D. Replacing primary markets with secondary markets
Rationale: Financial intermediaries (banks, mutual funds, insurance companies) pool savings and
allocate capital, providing liquidity, diversification, and risk transformation. They do not eliminate risk,
guarantee intrinsic pricing, or replace primary markets. Bodie et al. emphasize their role in reducing
transaction costs and information asymmetry.
🟢 2. An investor purchases 100 shares of a stock at $50 per share with a 60% initial margin and a 40%
maintenance margin. If the stock price falls to $35, what is the investor's margin position?
A. Margin call; equity is 30%
B. 🔴🔴 Margin call; equity is approximately 14.3%
C. No margin call; equity is 42.9%
D. No margin call; equity is 60%
Rationale: Loan = $50 × 100 × 0.40 = $2,000. New value = $35 × 100 = $3,500. Equity = $3,500 − $2,000 =
$1,500. Margin = $1,500 / $3,500 ≈ 42.9%. *Wait—this is incorrect.* Let me recalculate: Loan = $5,000 ×
0.40 = $2,000. Equity = $3,500 − $2,000 = $1,500. Margin = $1,500/$3,500 = 42.9%. No margin call. The
correct answer should be C. Correction: The question as written has an error. Let me revise:
🟢 2 (Revised). An investor purchases 100 shares at $50 with 60% initial margin. If the stock falls to $30,
what is the margin percentage?
A. 🔴🔴 33.3%
B. 40%
C. 25%
D. 50%
Rationale: Loan = $5,000 × 0.40 = $2,000. New value = $3,000. Equity = $1,000. Margin = 33.3%. This is
below the 40% maintenance margin, triggering a margin call. This tests application of margin mechanics
as covered in Chapter 3.
,🟢 3. Which of the following is NOT a characteristic of a money market instrument?
A. High liquidity
B. Short maturity (typically < 1 year)
C. 🔴🔴 High default risk
D. Low price volatility
Rationale: Money market instruments (T-bills, commercial paper, CDs) are characterized by low default
risk, not high. They are short-term, liquid, and low-volatility. This is foundational Chapter 2 material.
🟢 4. An investor following a passive investment strategy would most likely:
A. Engage in frequent trading based on technical analysis
B. 🔴🔴 Hold a diversified portfolio replicating a broad market index
C. Concentrate holdings in a single sector to maximize returns
D. Use derivatives to speculate on short-term price movements
Rationale: Passive investing seeks to match market returns through index replication, minimizing trading
and management fees. Bodie et al. contrast this with active strategies that attempt to outperform the
market.
🟢 5. In the context of the 2008 financial crisis, which investment vehicle was most directly implicated in
amplifying systemic risk through leverage and opaque valuation?
A. Municipal bonds
B. 🔴🔴 Collateralized Debt Obligations (CDOs)
C. Treasury Inflation-Protected Securities (TIPS)
D. Money market mutual funds
Rationale: CDOs, particularly those backed by subprime mortgages, were central to the 2008 crisis. Their
complexity, leverage, and lack of transparency led to massive losses and contagion. This is discussed in
Bodie et al. as a real-world case study of investment risk.
🟢 6. Which of the following orders is executed immediately at the best available price?
A. Limit order
B. 🔴🔴 Market order
C. Stop-loss order
D. Stop-buy order
Rationale: A market order is executed immediately at the prevailing market price. Limit orders specify a
price ceiling/floor; stop orders become market orders once a trigger price is reached. Chapter 3 covers
order types.
, 🟢 7. An investor sells short 200 shares at $80. If the price rises to $95, what is the investor's loss
(ignoring dividends and commissions)?
A. $1,600
B. **🔴🔴** $3,000
C. $2,400
D. $1,900
Rationale: Short sale proceeds = $16,000. Cost to cover = $19,000. Loss = $3,000. Short selling
mechanics are covered in Chapter 3.
🟢 8. Which of the following best describes the "free-rider" problem in the context of information
production?
A. Investors who trade on inside information
B. 🔴🔴 Investors who benefit from others' research without paying for it
C. Brokers who execute trades without disclosing fees
D. Firms that issue new shares without shareholder approval
Rationale: The free-rider problem arises when investors use publicly available research without
contributing to its production, leading to underinvestment in information. Bodie et al. discuss this in
market efficiency and information economics.
🟢 9. A Treasury bill with a face value of $10,000 and 90 days to maturity is selling for $9,850. What is the
bank discount yield?
A. 🔴🔴 6.00%
B. 6.09%
C. 6.22%
D. 5.85%
Rationale: Bank discount yield = (Discount / Face) × (360 / Days) = ($150/$10,000) × (360/90) = 0.015 × 4
= 6.00%. This is a standard money market yield calculation from Chapter 2.
🟢 10. Which of the following is a key difference between forward and futures contracts?
A. Forward contracts are standardized; futures are customized
B. 🔴🔴 Futures contracts are marked to market daily; forwards are not
C. Futures have higher counterparty risk than forwards
D. Forwards trade on exchanges; futures trade OTC
Rationale: Futures are exchange-traded, standardized, and marked to market daily. Forwards are OTC,
customized, and carry counterparty risk. Chapter 2 and later derivatives chapters cover this distinction.
(13th Edition) | Accredited Test Bank &
Solutions | All Lessons Included | 2025
Comprehensive Advanced-Level
Multiple-Choice Examination
Target Audience: College students, finance professionals, CFA candidates
Difficulty Level: Advanced / Hard / Mixed
Total Questions: 150
Format: One correct answer per question with detailed rationale
Table of Contents
Section Topic Questions
I The Investment Environment & Asset Classes 1–15
II Risk and Return: Past and Prologue 16–30
III Efficient Diversification & Portfolio Theory 31–50
IV Capital Asset Pricing Model & Index Models 51–65
V Arbitrage Pricing Theory & Multifactor Models 66–75
VI Market Efficiency & Behavioral Finance 76–90
VII Fixed-Income Securities: Prices, Yields & Term Structure 91–110
VIII Equity Valuation Models 111–125
,Section Topic Questions
IX Derivatives: Options, Futures & Swaps 126–140
X Active Portfolio Management & Performance Evaluation 141–150
Section I: The Investment Environment & Asset Classes (Questions 1–15)
🟢 1. Which of the following best describes the primary role of financial intermediaries in the investment
environment?
A. Eliminating all investment risk for retail investors
B. 🔴🔴 Channeling funds from savers to borrowers while providing liquidity and risk transformation
C. Ensuring that all securities trade at their intrinsic value
D. Replacing primary markets with secondary markets
Rationale: Financial intermediaries (banks, mutual funds, insurance companies) pool savings and
allocate capital, providing liquidity, diversification, and risk transformation. They do not eliminate risk,
guarantee intrinsic pricing, or replace primary markets. Bodie et al. emphasize their role in reducing
transaction costs and information asymmetry.
🟢 2. An investor purchases 100 shares of a stock at $50 per share with a 60% initial margin and a 40%
maintenance margin. If the stock price falls to $35, what is the investor's margin position?
A. Margin call; equity is 30%
B. 🔴🔴 Margin call; equity is approximately 14.3%
C. No margin call; equity is 42.9%
D. No margin call; equity is 60%
Rationale: Loan = $50 × 100 × 0.40 = $2,000. New value = $35 × 100 = $3,500. Equity = $3,500 − $2,000 =
$1,500. Margin = $1,500 / $3,500 ≈ 42.9%. *Wait—this is incorrect.* Let me recalculate: Loan = $5,000 ×
0.40 = $2,000. Equity = $3,500 − $2,000 = $1,500. Margin = $1,500/$3,500 = 42.9%. No margin call. The
correct answer should be C. Correction: The question as written has an error. Let me revise:
🟢 2 (Revised). An investor purchases 100 shares at $50 with 60% initial margin. If the stock falls to $30,
what is the margin percentage?
A. 🔴🔴 33.3%
B. 40%
C. 25%
D. 50%
Rationale: Loan = $5,000 × 0.40 = $2,000. New value = $3,000. Equity = $1,000. Margin = 33.3%. This is
below the 40% maintenance margin, triggering a margin call. This tests application of margin mechanics
as covered in Chapter 3.
,🟢 3. Which of the following is NOT a characteristic of a money market instrument?
A. High liquidity
B. Short maturity (typically < 1 year)
C. 🔴🔴 High default risk
D. Low price volatility
Rationale: Money market instruments (T-bills, commercial paper, CDs) are characterized by low default
risk, not high. They are short-term, liquid, and low-volatility. This is foundational Chapter 2 material.
🟢 4. An investor following a passive investment strategy would most likely:
A. Engage in frequent trading based on technical analysis
B. 🔴🔴 Hold a diversified portfolio replicating a broad market index
C. Concentrate holdings in a single sector to maximize returns
D. Use derivatives to speculate on short-term price movements
Rationale: Passive investing seeks to match market returns through index replication, minimizing trading
and management fees. Bodie et al. contrast this with active strategies that attempt to outperform the
market.
🟢 5. In the context of the 2008 financial crisis, which investment vehicle was most directly implicated in
amplifying systemic risk through leverage and opaque valuation?
A. Municipal bonds
B. 🔴🔴 Collateralized Debt Obligations (CDOs)
C. Treasury Inflation-Protected Securities (TIPS)
D. Money market mutual funds
Rationale: CDOs, particularly those backed by subprime mortgages, were central to the 2008 crisis. Their
complexity, leverage, and lack of transparency led to massive losses and contagion. This is discussed in
Bodie et al. as a real-world case study of investment risk.
🟢 6. Which of the following orders is executed immediately at the best available price?
A. Limit order
B. 🔴🔴 Market order
C. Stop-loss order
D. Stop-buy order
Rationale: A market order is executed immediately at the prevailing market price. Limit orders specify a
price ceiling/floor; stop orders become market orders once a trigger price is reached. Chapter 3 covers
order types.
, 🟢 7. An investor sells short 200 shares at $80. If the price rises to $95, what is the investor's loss
(ignoring dividends and commissions)?
A. $1,600
B. **🔴🔴** $3,000
C. $2,400
D. $1,900
Rationale: Short sale proceeds = $16,000. Cost to cover = $19,000. Loss = $3,000. Short selling
mechanics are covered in Chapter 3.
🟢 8. Which of the following best describes the "free-rider" problem in the context of information
production?
A. Investors who trade on inside information
B. 🔴🔴 Investors who benefit from others' research without paying for it
C. Brokers who execute trades without disclosing fees
D. Firms that issue new shares without shareholder approval
Rationale: The free-rider problem arises when investors use publicly available research without
contributing to its production, leading to underinvestment in information. Bodie et al. discuss this in
market efficiency and information economics.
🟢 9. A Treasury bill with a face value of $10,000 and 90 days to maturity is selling for $9,850. What is the
bank discount yield?
A. 🔴🔴 6.00%
B. 6.09%
C. 6.22%
D. 5.85%
Rationale: Bank discount yield = (Discount / Face) × (360 / Days) = ($150/$10,000) × (360/90) = 0.015 × 4
= 6.00%. This is a standard money market yield calculation from Chapter 2.
🟢 10. Which of the following is a key difference between forward and futures contracts?
A. Forward contracts are standardized; futures are customized
B. 🔴🔴 Futures contracts are marked to market daily; forwards are not
C. Futures have higher counterparty risk than forwards
D. Forwards trade on exchanges; futures trade OTC
Rationale: Futures are exchange-traded, standardized, and marked to market daily. Forwards are OTC,
customized, and carry counterparty risk. Chapter 2 and later derivatives chapters cover this distinction.
