FIN 420 Security Analysis Exam Practice
Questions And Correct Answers
(Verified Answers) Plus Rationales 2027
Q&A | Instant Download Pdf
1. Which of the following best describes the primary objective of security
analysis?
A. Maximizing a company's accounting profit
B. Determining the intrinsic value and risk of securities
C. Eliminating all investment risk
D. Predicting short-term market movements
Answer: B. Determining the intrinsic value and risk of securities
Rationale: Security analysis evaluates financial, economic, and market
information to estimate a security's intrinsic value and assess its
associated risks.
2. The intrinsic value of a common stock is best described as:
A. Its current market price
B. Its book value per share
C. The value justified by its expected future cash flows and risk
D. Its stated par value
Answer: C. The value justified by its expected future cash flows and risk
Rationale: Intrinsic value represents an analyst's estimate of what a
security is fundamentally worth based on expected cash flows, growth,
and risk.
, 3. Which approach to security analysis begins with economic conditions
and proceeds to industry and company analysis?
A. Technical analysis
B. Top-down analysis
C. Bottom-up analysis
D. Random-walk analysis
Answer: B. Top-down analysis
Rationale: Top-down analysis moves from the broad economy to industries
and finally to individual companies and securities.
4. Which economic variable is generally considered a leading indicator of
economic activity?
A. Unemployment rate
B. Consumer confidence
C. Corporate bankruptcy rate
D. Historical GDP
Answer: B. Consumer confidence
Rationale: Consumer confidence can change before actual economic
activity and therefore may provide information about future consumption
and economic conditions.
5. Gross domestic product (GDP) measures:
A. The total wealth owned by households
B. The total market value of final goods and services produced within an
economy
C. Government tax revenue
D. Corporate profits after taxes
Answer: B. The total market value of final goods and services produced
within an economy
,Rationale: GDP measures the value of final goods and services produced
within a country's borders during a specified period.
6. An increase in inflation generally has what effect on the purchasing
power of money?
A. It increases purchasing power
B. It has no effect
C. It decreases purchasing power
D. It guarantees higher real returns
Answer: C. It decreases purchasing power
Rationale: Inflation causes the general price level to rise, reducing the
amount of goods and services that a unit of currency can purchase.
7. If interest rates rise substantially, which type of security is generally
most negatively affected, all else equal?
A. Existing long-term bonds
B. Cash
C. Floating-rate securities
D. Treasury bills approaching maturity
Answer: A. Existing long-term bonds
Rationale: Bond prices move inversely with interest rates, and longer-
maturity bonds generally have greater interest-rate sensitivity.
8. Which monetary policy action is generally considered expansionary?
A. Increasing the policy interest rate
B. Selling government securities
C. Reducing the money supply
D. Lowering the policy interest rate
Answer: D. Lowering the policy interest rate
, Rationale: Lower interest rates generally encourage borrowing and
investment, supporting economic activity.
9. In security analysis, the business cycle is important because:
A. All companies perform identically throughout the cycle
B. Economic conditions can affect revenues, profits, and valuations
C. Stock prices never respond to economic changes
D. It determines a company's accounting method
Answer: B. Economic conditions can affect revenues, profits, and
valuations
Rationale: Different industries and companies respond differently to
expansions, recessions, recoveries, and contractions.
10. Which factor would most likely increase the required rate of
return on a security?
A. Lower perceived risk
B. Greater expected liquidity
C. Greater investment risk
D. A guaranteed cash flow
Answer: C. Greater investment risk
Rationale: Investors generally demand greater expected returns as
compensation for accepting greater risk.
11. Industry analysis primarily examines:
A. Only a company's dividend history
B. Competitive conditions and industry characteristics
C. Only the company's balance sheet
D. Daily stock price movements
Answer: B. Competitive conditions and industry characteristics
Questions And Correct Answers
(Verified Answers) Plus Rationales 2027
Q&A | Instant Download Pdf
1. Which of the following best describes the primary objective of security
analysis?
A. Maximizing a company's accounting profit
B. Determining the intrinsic value and risk of securities
C. Eliminating all investment risk
D. Predicting short-term market movements
Answer: B. Determining the intrinsic value and risk of securities
Rationale: Security analysis evaluates financial, economic, and market
information to estimate a security's intrinsic value and assess its
associated risks.
2. The intrinsic value of a common stock is best described as:
A. Its current market price
B. Its book value per share
C. The value justified by its expected future cash flows and risk
D. Its stated par value
Answer: C. The value justified by its expected future cash flows and risk
Rationale: Intrinsic value represents an analyst's estimate of what a
security is fundamentally worth based on expected cash flows, growth,
and risk.
, 3. Which approach to security analysis begins with economic conditions
and proceeds to industry and company analysis?
A. Technical analysis
B. Top-down analysis
C. Bottom-up analysis
D. Random-walk analysis
Answer: B. Top-down analysis
Rationale: Top-down analysis moves from the broad economy to industries
and finally to individual companies and securities.
4. Which economic variable is generally considered a leading indicator of
economic activity?
A. Unemployment rate
B. Consumer confidence
C. Corporate bankruptcy rate
D. Historical GDP
Answer: B. Consumer confidence
Rationale: Consumer confidence can change before actual economic
activity and therefore may provide information about future consumption
and economic conditions.
5. Gross domestic product (GDP) measures:
A. The total wealth owned by households
B. The total market value of final goods and services produced within an
economy
C. Government tax revenue
D. Corporate profits after taxes
Answer: B. The total market value of final goods and services produced
within an economy
,Rationale: GDP measures the value of final goods and services produced
within a country's borders during a specified period.
6. An increase in inflation generally has what effect on the purchasing
power of money?
A. It increases purchasing power
B. It has no effect
C. It decreases purchasing power
D. It guarantees higher real returns
Answer: C. It decreases purchasing power
Rationale: Inflation causes the general price level to rise, reducing the
amount of goods and services that a unit of currency can purchase.
7. If interest rates rise substantially, which type of security is generally
most negatively affected, all else equal?
A. Existing long-term bonds
B. Cash
C. Floating-rate securities
D. Treasury bills approaching maturity
Answer: A. Existing long-term bonds
Rationale: Bond prices move inversely with interest rates, and longer-
maturity bonds generally have greater interest-rate sensitivity.
8. Which monetary policy action is generally considered expansionary?
A. Increasing the policy interest rate
B. Selling government securities
C. Reducing the money supply
D. Lowering the policy interest rate
Answer: D. Lowering the policy interest rate
, Rationale: Lower interest rates generally encourage borrowing and
investment, supporting economic activity.
9. In security analysis, the business cycle is important because:
A. All companies perform identically throughout the cycle
B. Economic conditions can affect revenues, profits, and valuations
C. Stock prices never respond to economic changes
D. It determines a company's accounting method
Answer: B. Economic conditions can affect revenues, profits, and
valuations
Rationale: Different industries and companies respond differently to
expansions, recessions, recoveries, and contractions.
10. Which factor would most likely increase the required rate of
return on a security?
A. Lower perceived risk
B. Greater expected liquidity
C. Greater investment risk
D. A guaranteed cash flow
Answer: C. Greater investment risk
Rationale: Investors generally demand greater expected returns as
compensation for accepting greater risk.
11. Industry analysis primarily examines:
A. Only a company's dividend history
B. Competitive conditions and industry characteristics
C. Only the company's balance sheet
D. Daily stock price movements
Answer: B. Competitive conditions and industry characteristics
