Twenty Four Pages, One Hundred Twenty Items CFMS Quiz by ChatGPT

Quiz Exercise for CFMS

1. Capital Markets
1.Definition-based Question:
○What are the two basic types of market procedures in the stock market?
1.Primary and Secondary Markets
2.Physical Location Exchanges and Over-The-Counter (OTC)
3.Dealer Markets and Auction Markets
4.Equity and Bond Markets
Answer: 2. Physical Location Exchanges and Over-The-Counter (OTC)
Explanation: The stock market has two main procedures: physical
location exchanges (e.g., NYSE) and OTC markets (electronically
connected brokers and dealers).
2.True/False Question:
○The efficient market hypothesis (EMH) assumes that all investors are rational.
Answer: True
Explanation: EMH assumes that markets reflect all available information due to
rational investor actions, though real-world studies challenge this assumption.
3.Scenario-based Question:
○Jamie observes that most investors are selling stock X due to recent negative
news. Jamie decides to sell her shares as well. What behavioral finance concept
does this demonstrate?
1.Loss Aversion
2.Herd Behavior
3.Mental Accounting
4.Anchoring
Answer: 2. Herd Behavior
Explanation: Herd behavior refers to the tendency to mimic the actions
of a large group, often leading to dramatic market rallies or sell-offs.
Interest Rates
4. Definition-based Question:
●What is the term for the premium added to interest rates due to expected inflation?
1.Default Risk Premium
2.Liquidity Premium
3.Inflation Premium
4.Maturity Premium
Answer: 3. Inflation Premium
Explanation: Investors add an inflation premium to the real risk-free rate to
account for anticipated inflation over time.
5.True/False Question:
○Higher expected inflation leads to lower interest rates.
Answer: False
Explanation: Higher expected inflation generally increases interest rates as
lenders demand higher returns to compensate for reduced purchasing power.
6.Scenario-based Question:
○A company borrows funds with the expectation of stable interest rates but later
faces rising costs due to rate hikes. This scenario reflects:
1.Default Risk

2. 2.Reinvestment Rate Risk
3.Interest Rate Risk
4.Liquidity Risk
Answer: 3. Interest Rate Risk
Explanation: Interest rate risk involves potential capital losses when
market interest rates change.
Taxation
7. Definition-based Question:
●What is double taxation in the context of corporate taxation?
1.Taxing both revenue and expenses
2.Taxing a corporation's profits and shareholders' dividends
3.Applying state and federal taxes simultaneously
4.Imposing penalties for late tax payments
Answer: 2. Taxing a corporation's profits and shareholders' dividends
Explanation: Double taxation occurs when corporate profits are taxed, and then
shareholders pay taxes on distributed dividends.
8.True/False Question:
○Tax credits reduce taxable income.
Answer: False
Explanation: Tax credits directly reduce tax liability, whereas deductions lower
taxable income.
9.Scenario-based Question:
○To minimize taxes, a company invests in municipal bonds. Which tax planning
strategy does this illustrate?
1.Deferral
2.Avoidance
3.Exemption
4.Tax Sheltering
Answer: 3. Exemption
Explanation: Municipal bonds often provide interest income exempt from
federal taxes.
Financial Analysis
10. Definition-based Question: - What ratio evaluates a firm's ability to pay off short-term
obligations? 1. Profitability Ratio 2. Liquidity Ratio 3. Market Value Ratio 4. Debt Management
Ratio
Answer: 2. Liquidity Ratio
Explanation: Liquidity ratios, such as the current and quick ratios, assess a firm's ability to
meet short-term liabilities.
11.True/False Question:
○A higher debt-to-equity ratio indicates lower financial risk.
Answer: False

3. Explanation: A higher debt-to-equity ratio suggests greater reliance on debt
financing, which increases financial risk.
12.Scenario-based Question:
○An analyst notes that Company X’s operating profit margin has increased over
three years while its competitors' margins declined. What type of analysis is the
analyst performing?
1.Vertical Analysis
2.Horizontal Analysis
3.Ratio Analysis
4.Comprehensive Analysis
Answer: 2. Horizontal Analysis
Explanation: Horizontal analysis compares financial data across time to
detect trends.
Behavioral Finance
13.Definition-based Question:
○What is the tendency to avoid losses more than valuing equivalent gains?
1.Anchoring
2.Herd Behavior
3.Confirmation Bias
4.Loss Aversion
Answer: 4. Loss Aversion
Explanation: Loss aversion describes the behavior of prioritizing loss
prevention over gains, even when risks are reasonable.
14.True/False Question:
○Emotional gaps can lead to irrational investment decisions.
Answer: True
Explanation: Emotional strain, such as fear or excitement, often results in
decisions that deviate from rational investment strategies.
15.Scenario-based Question:
○An investor sticks with underperforming stock because they believe their past
success in another market proves their ability to pick winners. What bias is this?
1.Self-attribution Bias
2.Mental Accounting
3.Confirmation Bias
4.Familiarity Bias
Answer: 1. Self-attribution Bias
Explanation: This bias occurs when overconfidence in personal skill
overrides objective evaluation.
Capital Budgeting
16.Definition-based Question:
○Which metric calculates the time required to recover an investment's initial cost?
1.Net Present Value (NPV)
2.Payback Period
3.Internal Rate of Return (IRR)

4. 4.Profitability Index
Answer: 2. Payback Period
Explanation: The payback period measures how long it takes for
cumulative cash flows to cover initial outlays.
17.True/False Question:
○A positive Net Present Value (NPV) indicates a project should be rejected.
Answer: False
Explanation: A positive NPV signifies that the project's returns exceed the cost
of capital, making it viable.
18.Scenario-based Question:
○A company evaluates two projects. Project A has a shorter payback period, while
Project B has a higher IRR. Which project aligns better with liquidity concerns?
1.Project A
2.Project B
3.Both equally
4.Neither
Answer: 1. Project A
Explanation: A shorter payback period improves liquidity by quickly
recovering the investment.
Interest Rates
19.Definition-based Question:
○What type of yield curve slopes upward, showing higher long-term yields than
short-term yields?
1.Inverted
2.Humped
3.Normal
4.Flat
Answer: 3. Normal
Explanation: A normal yield curve reflects expectations of economic
growth and inflation over time.
20.True/False Question:
○Liquidity premiums decrease the equilibrium interest rate on securities.
Answer: False
Explanation: Liquidity premiums increase the equilibrium interest rate to
compensate for the difficulty of converting assets to cash.
21.Scenario-based Question:
○An investor observes a downward-sloping yield curve and decides to shift
investments into short-term bonds. What is their likely rationale?
1.Inflation Concerns
2.Lower Interest Rate Risk
3.Reinvestment Rate Risk Avoidance
4.Higher Liquidity Premiums
Answer: 2. Lower Interest Rate Risk
Explanation: Inverted yield curves often signal economic downturns,
making short-term bonds safer against long-term interest rate changes.

5. Financial Institutions and Markets
22.Definition-based Question:
○Which financial institution primarily facilitates savings and offers higher rates to
its members compared to traditional banks?
1.Insurance Company
2.Credit Union
3.Brokerage Firm
4.Central Bank
Answer: 2. Credit Union
Explanation: Credit unions are member-owned and provide higher
savings rates and lower loan rates.
23.True/False Question:
○Financial markets primarily serve to facilitate investment and trade of financial
assets.
Answer: True
Explanation: Financial markets enable the buying, selling, and valuation of
assets like stocks and bonds, promoting economic efficiency.
24.Scenario-based Question:
○A client seeks to diversify investments by purchasing stocks and bonds through
an intermediary. Which type of institution should they approach?
1.Insurance Company
2.Investment Bank
3.Brokerage Firm
4.Commercial Bank
Answer: 3. Brokerage Firm
Explanation: Brokerage firms specialize in buying and selling financial
assets for clients.
Tax Planning and Optimization
25.Definition-based Question:
○What tax planning method involves using losses to offset gains for a reduced tax
liability?
1.Deferral
2.Tax Gain-Loss Harvesting
3.Avoidance
4.Tax Sheltering
Answer: 2. Tax Gain-Loss Harvesting
Explanation: This method offsets capital gains with capital losses to
reduce tax obligations.
26.True/False Question:
○Holding investments for over a year can qualify them for lower long-term capital
gains taxes.
Answer: True

6. Explanation: Long-term capital gains are taxed at lower rates than short-term
gains, encouraging longer investment horizons.
27.Scenario-based Question:
○A high-income earner invests in municipal bonds to minimize tax exposure. What
strategy is this an example of?
1.Tax Sheltering
2.Deferral
3.Exemption
4.Optimization
Answer: 3. Exemption
Explanation: Municipal bonds often provide tax-exempt interest income,
reducing taxable income.
Financial Reporting and Disclosure
28.Definition-based Question:
○Which financial statement provides a snapshot of a company’s financial position
at a specific point in time?
1.Income Statement
2.Balance Sheet
3.Cash Flow Statement
4.Free Cash Flow Statement
Answer: 2. Balance Sheet
Explanation: The balance sheet lists assets, liabilities, and shareholder
equity, reflecting financial standing at a specific date.
29.True/False Question:
○The income statement tracks cash inflows and outflows over a period of time.
Answer: False
Explanation: The cash flow statement, not the income statement, tracks cash
movements. The income statement focuses on revenues and expenses.
30.Scenario-based Question:
○A company shows increased liabilities and reduced assets. What impact is likely
on its financial health?
1.Increased Liquidity
2.Reduced Debt Ratio
3.Declined Solvency
4.Improved Profitability
Answer: 3. Declined Solvency
Explanation: Increasing liabilities relative to assets reduces a company’s
ability to meet long-term obligations.
Risk Management
31.Definition-based Question:
○What type of risk refers to a borrower’s inability to repay a loan?
1.Liquidity Risk
2.Operational Risk
3.Market Risk

7. 4.Credit Risk
Answer: 4. Credit Risk
Explanation: Credit risk arises from the possibility of default on debt
obligations.
32.True/False Question:
○Market risk affects asset values due to external economic factors like recessions.
Answer: True
Explanation: Market risk, also known as systematic risk, is driven by broad
market conditions.
33.Scenario-based Question:
○A bank’s reputation suffers after a data breach revealing customer information.
What type of risk is this?
1.Credit Risk
2.Reputational Risk
3.Liquidity Risk
4.Market Risk
Answer: 2. Reputational Risk
Explanation: Reputational risk impacts public perception and trust due to
events like data breaches or fraud.
Banking and Financial Institutions
34.Definition-based Question:
○What is the role of the Federal Reserve in the U.S. banking system?
1.Setting Reserve Requirements
2.Issuing Insurance Policies
3.Auditing Commercial Banks
4.Providing Consumer Loans
Answer: 1. Setting Reserve Requirements
Explanation: The Federal Reserve regulates monetary policy, including
reserve requirements for banks.
35.True/False Question:
○Credit unions are for-profit financial institutions.
Answer: False
Explanation: Credit unions are non-profit organizations owned by their
members.
36.Scenario-based Question:
○A business owner deposits funds into a savings account earning interest. Which
financial institution service is being utilized?
1.Loan Service
2.Investment Service
3.Deposit Service
4.Insurance Service
Answer: 3. Deposit Service
Explanation: Savings accounts fall under deposit services, allowing
funds to earn interest.

8. Investment and Portfolio Management
37.Definition-based Question:
○Which theory suggests that investors can maximize returns by diversifying across
multiple asset classes?
1.Modern Portfolio Theory
2.Efficient Market Hypothesis
3.Behavioral Finance
4.Capital Asset Pricing Model
Answer: 1. Modern Portfolio Theory
Explanation: Modern Portfolio Theory emphasizes diversification to
manage risk and optimize returns.
38.True/False Question:
○Asset allocation determines the performance of a portfolio more than individual
stock selection.
Answer: True
Explanation: Studies show that asset allocation is the primary driver of portfolio
performance.
39.Scenario-based Question:
○An investor with a high risk tolerance allocates 80% of their portfolio to stocks
and 20% to bonds. What strategy is being used?
1.Conservative
2.Moderate
3.Aggressive
4.Balanced
Answer: 3. Aggressive
Explanation: A high allocation to equities reflects an aggressive
investment strategy.
Cash Flow and Working Capital Management
40.Definition-based Question:
○What is the main objective of cash flow analysis?
1.Assessing Profitability
2.Monitoring Debt Levels
3.Evaluating Liquidity
4.Measuring Operational Efficiency
Answer: 3. Evaluating Liquidity
Explanation: Cash flow analysis ensures sufficient cash availability for
operational needs and investments.
41.True/False Question:
○Negative cash flow always indicates poor financial health.
Answer: False
Explanation: Negative cash flow may result from strategic investments or growth
activities, not necessarily poor health.
42.Scenario-based Question:
○A company experiences delayed customer payments, leading to difficulty
covering payroll. What aspect of cash flow management needs improvement?

9. 1.Cash Flow Forecasting
2.Accounts Receivable Management
3.Inventory Turnover
4.Capital Investment Decisions
Answer: 2. Accounts Receivable Management
Explanation: Efficient management of receivables ensures timely inflows
to meet financial obligations.
Bonds and Their Valuation
43.Definition-based Question:
○What is the term for the risk that a bond issuer may fail to make payments?
1.Liquidity Risk
2.Default Risk
3.Reinvestment Risk
4.Interest Rate Risk
Answer: 2. Default Risk
Explanation: Default risk reflects the possibility that the bond issuer may
not fulfill payment obligations.
44.True/False Question:
○A bond’s yield to maturity assumes that all interest payments are reinvested at
the bond’s coupon rate.
Answer: True
Explanation: Yield to maturity includes the assumption that interest payments
are reinvested at the coupon rate.
45.Scenario-based Question:
○An investor purchases a 10-year bond at a lower price because it offers higher
returns than similar bonds. What is this investor benefiting from?
1.Risk Premium
2.Yield Spread
3.Maturity Premium
4.Liquidity Discount
Answer: 3. Maturity Premium
Explanation: Longer maturities typically offer higher yields to
compensate for increased risk.
Corporate Governance
46.Definition-based Question:
○Which principle ensures that management acts in the best interest of
shareholders?
1.Agency Theory
2.Stakeholder Theory
3.Stewardship Theory
4.Corporate Social Responsibility
Answer: 1. Agency Theory
Explanation: Agency theory addresses conflicts between management
and shareholders, aiming for alignment of interests.

10. 47.True/False Question:
○Corporate governance frameworks include practices for ethical conduct and
accountability.
Answer: True
Explanation: Effective corporate governance ensures transparency,
accountability, and ethical behavior.
48.Scenario-based Question:
○A firm establishes an independent audit committee to oversee financial practices.
Which governance principle does this reflect?
1.Transparency
2.Board Accountability
3.Risk Management
4.Conflict of Interest Mitigation
Answer: 1. Transparency
Explanation: Independent oversight enhances transparency and trust in
financial reporting.
Monetary Policy
49.Definition-based Question:
○What is the goal of contractionary monetary policy?
1.Increase Employment
2.Stimulate Economic Growth
3.Reduce Inflation
4.Strengthen Currency Value
Answer: 3. Reduce Inflation
Explanation: Contractionary policies curb inflation by reducing money
supply and increasing interest rates.
50.True/False Question:
○Lowering reserve requirements increases the money supply in the economy.
Answer: True
Explanation: Lower reserves allow banks to lend more, expanding the money
supply.
51.Scenario-based Question:
○A central bank raises interest rates to cool an overheated economy. What
economic effect is it targeting?
1.Inflation Reduction
2.Increased Consumption
3.Higher Employment
4.Trade Deficit Reduction
Answer: 1. Inflation Reduction
Explanation: Higher rates reduce spending and borrowing, tempering
inflationary pressures.
Capital Structure

11. 52.Definition-based Question:
○What is the Weighted Average Cost of Capital (WACC)?
1.The sum of all debt costs
2.The average return required by all investors
3.The cost of issuing new equity
4.The interest paid on debt
Answer: 2. The average return required by all investors
Explanation: WACC combines the cost of equity and debt, weighted by
their proportion in capital structure.
53.True/False Question:
○A firm’s capital structure directly impacts its risk and return profile.
Answer: True
Explanation: The mix of debt and equity determines a company’s financial
stability and shareholder returns.
54.Scenario-based Question:
○A firm issues more debt to take advantage of tax benefits but risks financial
distress. What trade-off is being evaluated?
1.Risk vs. Return
2.Debt vs. Equity Financing
3.Cost vs. Liquidity
4.Growth vs. Profitability
Answer: 2. Debt vs. Equity Financing
Explanation: Debt provides tax shields but increases financial risk,
requiring a balance in the capital structure.
Financial Analysis Techniques
55.Definition-based Question:
○What analysis method compares financial statement line items across multiple
years?
1.Ratio Analysis
2.Horizontal Analysis
3.Vertical Analysis
4.Regression Analysis
Answer: 2. Horizontal Analysis
Explanation: Horizontal analysis identifies trends by comparing financial
data over time.
56.True/False Question:
○A higher current ratio indicates better short-term liquidity.
Answer: True
Explanation: The current ratio measures a firm’s ability to meet short-term
liabilities with current assets.
57.Scenario-based Question:
○A company has a net profit margin of 15% while its competitor's margin is 10%.
What can this indicate?
1.Better Debt Management
2.Higher Cost Efficiency
3.Reduced Asset Utilization

12. 4.Overpriced Products
Answer: 2. Higher Cost Efficiency
Explanation: A higher margin suggests better control over costs relative
to revenue.
Behavioral Finance and Investment Strategy
58.Definition-based Question:
○What is the term for the psychological tendency to focus on recent events and
assume they will continue?
1.Confirmation Bias
2.Recency Bias
3.Loss Aversion
4.Mental Accounting
Answer: 2. Recency Bias
Explanation: Recency bias causes investors to overemphasize recent
performance in decision-making.
59.True/False Question:
○Anchoring is the tendency to attach decisions to irrelevant reference points.
Answer: True
Explanation: Anchoring occurs when individuals rely on initial information, even
if it’s not pertinent.
60.Scenario-based Question:
○An investor sells a stock after it drops by 5%, fearing further losses despite long-
term growth potential. What bias is this?
1.Emotional Gap
2.Loss Aversion
3.Familiarity Bias
4.Herd Behavior
Answer: 2. Loss Aversion
Explanation: The investor prioritizes avoiding losses over potential gains,
demonstrating loss aversion.
Fixed Income Portfolio Management
61.Definition-based Question:
○Which strategy involves holding bonds until maturity to eliminate interest rate
risk?
1.Passive Management
2.Active Management
3.Duration Matching
4.Immunization Strategy
Answer: 4. Immunization Strategy
Explanation: Immunization aligns bond durations with liabilities to
mitigate interest rate fluctuations.
62.True/False Question:
○Active bond portfolio management aims to outperform market benchmarks.
Answer: True

13. Explanation: Active strategies involve selecting bonds to exceed returns from
standard indices.
63.Scenario-based Question:
○A portfolio manager shifts investments from long-term bonds to short-term bonds
in anticipation of rising interest rates. What is the manager attempting to reduce?
1.Reinvestment Risk
2.Interest Rate Risk
3.Liquidity Risk
4.Credit Risk
Answer: 2. Interest Rate Risk
Explanation: Short-term bonds are less sensitive to interest rate changes
than long-term bonds.
Cash and Working Capital Management
64.Definition-based Question:
○What term describes the time between paying for inventory and receiving cash
from sales?
1.Inventory Turnover
2.Cash Conversion Cycle
3.Days Payable Outstanding
4.Receivables Turnover
Answer: 2. Cash Conversion Cycle
Explanation: The cash conversion cycle measures how efficiently a
company converts investments in inventory into cash.
65.True/False Question:
○Excess working capital always improves financial performance.
Answer: False
Explanation: Excess working capital can indicate inefficiencies, such as
overstocked inventory or delayed collections.
66.Scenario-based Question:
○A company shortens payment terms for customers to accelerate cash inflows.
Which working capital component is being optimized?
1.Accounts Receivable
2.Inventory
3.Accounts Payable
4.Short-term Debt
Answer: 1. Accounts Receivable
Explanation: Reducing collection periods speeds up cash inflows from
credit sales.
Income and Business Taxation
67.Definition-based Question:
○What tax deduction allows corporations to reduce taxable income by the value of
employee benefits?

14. 1.Fringe Benefits Deduction
2.Operating Expense Deduction
3.Tax Shield
4.Depreciation Deduction
Answer: 1. Fringe Benefits Deduction
Explanation: Fringe benefits like health insurance and tuition
reimbursement are deductible for businesses.
68.True/False Question:
○Double taxation applies to all business entities.
Answer: False
Explanation: Double taxation applies to corporations, not entities like S-
corporations or sole proprietorships.
69.Scenario-based Question:
○A business uses accelerated depreciation to lower its tax liability in the early
years of asset use. What tax strategy is this?
1.Deferral
2.Avoidance
3.Exemption
4.Credit Optimization
Answer: 1. Deferral
Explanation: Accelerated depreciation defers taxes by front-loading
deductible expenses.
Mergers and Acquisitions (M&A)
70.Definition-based Question:
○What term describes the merging of companies operating at different stages of
the supply chain?
1.Horizontal Merger
2.Vertical Merger
3.Conglomerate Merger
4.Consolidation Merger
Answer: 2. Vertical Merger
Explanation: Vertical mergers combine companies at different points in
the production or distribution process.
71.True/False Question:
○Synergies from mergers always result in cost reductions.
Answer: False
Explanation: Synergies can also increase revenue through expanded market
access or combined capabilities.
72.Scenario-based Question:
○A retail company merges with a supplier to gain better control over inventory
costs. What type of merger is this?
1.Horizontal Merger
2.Vertical Merger
3.Conglomerate Merger
4.Joint Venture
Answer: 2. Vertical Merger

15. Explanation: Merging with a supplier is a vertical integration strategy to
streamline supply chain costs.
Financial Modeling
73.Definition-based Question:
○What does a financial model typically aim to forecast?
1.Historical Financial Performance
2.Future Economic Trends
3.Company Stock Performance
4.All of the Above
Answer: 4. All of the Above
Explanation: Financial models use data to predict stock performance,
company growth, and economic conditions.
74.True/False Question:
○Sensitivity analysis in financial modeling measures how changes in assumptions
impact outcomes.
Answer: True
Explanation: Sensitivity analysis tests the impact of varying inputs like costs or
revenues on model results.
75.Scenario-based Question:
○An analyst builds a financial model using last year’s revenue as the basis for
forecasting future sales. What approach is being used?
1.Scenario Analysis
2.Historical Trend Analysis
3.Discounted Cash Flow Modeling
4.Assumption-based Modeling
Answer: 2. Historical Trend Analysis
Explanation: Using past data to predict future outcomes reflects trend
analysis.
Portfolio Theory
76.Definition-based Question:
○What metric measures the return of a portfolio relative to the risk-free rate,
adjusted for risk?
1.Alpha
2.Beta
3.Sharpe Ratio
4.Standard Deviation
Answer: 3. Sharpe Ratio
Explanation: The Sharpe Ratio assesses risk-adjusted performance by
considering returns above the risk-free rate per unit of risk.
77.True/False Question:

16. ○Diversification eliminates all types of investment risk.
Answer: False
Explanation: Diversification reduces unsystematic risk but does not eliminate
systematic risk, such as market-wide fluctuations.
78.Scenario-based Question:
○A portfolio manager diversifies investments across industries to reduce exposure
to a sector downturn. What principle is being applied?
1.Risk Concentration
2.Efficient Frontier Theory
3.Modern Portfolio Theory
4.Asset Allocation
Answer: 3. Modern Portfolio Theory
Explanation: Diversification across uncorrelated assets reflects Modern
Portfolio Theory principles.
Dividend Policy
79.Definition-based Question:
○Which dividend policy maintains consistent payouts irrespective of earnings
fluctuations?
1.Residual Dividend Policy
2.Fixed Dividend Policy
3.Hybrid Dividend Policy
4.Irregular Dividend Policy
Answer: 2. Fixed Dividend Policy
Explanation: Fixed policies prioritize stable payouts to shareholders
regardless of annual earnings changes.
80.True/False Question:
○High dividend payout ratios indicate greater reinvestment into the company.
Answer: False
Explanation: High payout ratios reduce funds available for reinvestment, limiting
growth opportunities.
81.Scenario-based Question:
○A firm retains profits instead of paying dividends to fund a new product line. What
type of dividend policy is this?
1.Stable Dividend Policy
2.Residual Dividend Policy
3.Irregular Dividend Policy
4.Progressive Dividend Policy
Answer: 2. Residual Dividend Policy
Explanation: Residual policies prioritize funding operations over paying
dividends.
Behavioral Finance and Capital Markets
82.Definition-based Question:

17. ○Which theory argues that markets fully reflect all available information?
1.Efficient Market Hypothesis (EMH)
2.Behavioral Market Theory
3.Asset Pricing Model
4.Rational Expectations Theory
Answer: 1. Efficient Market Hypothesis (EMH)
Explanation: EMH assumes stock prices integrate all publicly available
data efficiently.
83.True/False Question:
○Behavioral finance challenges the Efficient Market Hypothesis by showing
irrational investor behavior.
Answer: True
Explanation: Behavioral finance highlights psychological biases and emotional
decision-making, contrary to EMH assumptions.
84.Scenario-based Question:
○Investors irrationally overbid on stocks during a bubble, ignoring underlying
fundamentals. What market phenomenon does this represent?
1.Efficient Pricing
2.Rational Expectations
3.Asset Bubble
4.Mean Reversion
Answer: 3. Asset Bubble
Explanation: Asset bubbles occur when prices exceed intrinsic value due
to irrational exuberance.
Capital Budgeting Techniques
85.Definition-based Question:
○What capital budgeting method considers the time value of money and discounts
future cash flows?
1.Payback Period
2.Net Present Value (NPV)
3.Internal Rate of Return (IRR)
4.Profitability Index
Answer: 2. Net Present Value (NPV)
Explanation: NPV evaluates investment returns by discounting future
cash flows to present value.
86.True/False Question:
○IRR is the discount rate that equates the present value of cash inflows with the
initial investment.
Answer: True
Explanation: IRR represents the break-even discount rate where NPV equals
zero.
87.Scenario-based Question:
○A company selects a project with an NPV of $200,000 over another with an NPV
of $150,000. What investment principle is applied?
1.Cost Minimization
2.Profitability Index

18. 3.Value Maximization
4.Risk Aversion
Answer: 3. Value Maximization
Explanation: Selecting the higher NPV project aligns with maximizing
shareholder value.
Interest Rate Risk and Yield Curve
88.Definition-based Question:
○What shape of the yield curve indicates short-term rates are higher than long-
term rates?
1.Normal
2.Inverted
3.Flat
4.Humped
Answer: 2. Inverted
Explanation: An inverted yield curve suggests short-term rates exceed
long-term rates, often signaling economic slowdown.
89.True/False Question:
○Interest rate risk affects bond prices inversely.
Answer: True
Explanation: When interest rates rise, bond prices typically fall, and vice versa.
90.Scenario-based Question:
○A financial manager shifts bond investments into long-term securities as rates
stabilize. What is the likely reason?
1.To Increase Reinvestment Risk
2.To Lock in Higher Yields
3.To Minimize Liquidity Risk
4.To Maximize Volatility
Answer: 2. To Lock in Higher Yields
Explanation: Long-term bonds secure yields in stable or declining rate
environments.
Banking Operations and Management
91.Definition-based Question:
○What banking activity involves facilitating payments through checks, transfers, or
cards?
1.Deposit Acceptance
2.Lending Services
3.Payment Agent Role
4.Currency Exchange
Answer: 3. Payment Agent Role
Explanation: Banks act as intermediaries, enabling secure and efficient
financial transactions.
92.True/False Question:
○Fractional reserve banking requires banks to hold reserves equal to all deposits.
Answer: False

19. Explanation: Fractional reserve banking mandates banks hold only a fraction of
total deposits as reserves, enabling loan creation.
93.Scenario-based Question:
○A bank focuses on short-term deposits while offering long-term loans. What role
does this reflect?
1.Credit Intermediation
2.Maturity Transformation
3.Risk Management
4.Money Creation
Answer: 2. Maturity Transformation
Explanation: Banks bridge short-term deposits and long-term loans,
facilitating economic activity.
Cash Flow Analysis
94.Definition-based Question:
○What term describes cash generated from core business operations?
1.Free Cash Flow
2.Net Income
3.Operating Cash Flow
4.Financing Cash Flow
Answer: 3. Operating Cash Flow
Explanation: Operating cash flow measures cash inflows and outflows
directly related to business operations.
95.True/False Question:
○Free cash flow is the amount available after covering operating expenses and
capital expenditures.
Answer: True
Explanation: Free cash flow represents funds available for distribution to
shareholders or reinvestment.
96.Scenario-based Question:
○A company sees increased cash inflows from investing activities. What might this
indicate?
1.Asset Sales
2.Higher Borrowing Costs
3.Reduced Operating Efficiency
4.Increased Dividend Payouts
Answer: 1. Asset Sales
Explanation: Positive investing cash flows often reflect proceeds from
selling long-term assets.
Equity Valuation
97.Definition-based Question:
○What valuation method estimates equity value by projecting and discounting
future cash flows?

20. 1.Asset-Based Valuation
2.Comparable Approach
3.Discounted Cash Flow (DCF)
4.Book Value Method
Answer: 3. Discounted Cash Flow (DCF)
Explanation: DCF evaluates intrinsic value by discounting expected cash
flows to their present value.
98.True/False Question:
○Asset-based valuation focuses on a company’s liabilities rather than its assets.
Answer: False
Explanation: Asset-based valuation assesses a company’s net assets,
considering liabilities and owned assets.
99.Scenario-based Question:
○A firm is valued based on recent sales of similar companies. What method is
being applied?
1.Precedent Transactions
2.Discounted Cash Flow
3.Comparables Approach
4.Asset-Based Valuation
Answer: 1. Precedent Transactions
Explanation: This approach uses historical data on similar company
sales to estimate valuation.
Risk Management
100. Definition-based Question:
- What type of risk arises from poor internal processes or systems?
1.Operational Risk
2.Market Risk
3.Reputational Risk
4.Liquidity Risk
Answer: 1. Operational Risk
Explanation: Operational risk stems from failures in processes, systems, or
personnel.
101. True/False Question:
- Liquidity risk occurs when an institution cannot meet its financial obligations due to
asset illiquidity.
Answer: True
Explanation: Liquidity risk is the inability to quickly convert assets to cash to meet
liabilities.
102. Scenario-based Question:
- A bank develops a formal risk identification process to address systemic issues. What
aspect of risk management is being implemented?
1.Risk Mitigation
2.Risk Assessment
3.Risk Identification
4.Risk Monitoring
Answer: 3. Risk Identification

21. Explanation: Identifying potential risks is the first step in developing effective risk
management strategies.
Financial Reporting and Disclosure
103. Definition-based Question:
- Which financial statement focuses on cash flows from operations, investing, and
financing?
1.Income Statement
2.Cash Flow Statement
3.Balance Sheet
4.Retained Earnings Statement
Answer: 2. Cash Flow Statement
Explanation: The cash flow statement categorizes inflows and outflows based
on operations, investments, and financing activities.
104. True/False Question:
- Financial reporting supports decision-making by communicating a company’s
performance.
Answer: True
Explanation: Accurate reporting provides stakeholders with insights to evaluate
financial health and make informed decisions.
105. Scenario-based Question:
- A company prepares a report detailing its revenues and expenses for the quarter.
Which financial statement is this?
1.Balance Sheet
2.Income Statement
3.Cash Flow Statement
4.Notes to Financial Statements
Answer: 2. Income Statement
Explanation: The income statement summarizes revenues, expenses, and net
income over a specific period.
Investment and Portfolio Management
106. Definition-based Question:
- What is the process of distributing investments across various asset classes to manage
risk?
1.Diversification
2.Asset Allocation
3.Hedging
4.Market Timing
Answer: 2. Asset Allocation
Explanation: Asset allocation spreads investments across classes (e.g., stocks,
bonds) to balance risk and return.
107. True/False Question:
- A well-diversified portfolio reduces exposure to both systematic and unsystematic risks.
Answer: False

22. Explanation: Diversification mitigates unsystematic risk but cannot eliminate systematic
risk.
108. Scenario-based Question:
- An investor reallocates their portfolio to include more bonds as they near retirement.
What strategy is being applied?
1.Risk Seeking
2.Growth Investing
3.Conservative Allocation
4.Sector Rotation
Answer: 3. Conservative Allocation
Explanation: Shifting toward bonds reduces volatility and aligns with risk
aversion in retirement planning.
Behavioral Finance and Emotion in Investing
109. Definition-based Question:
- What bias leads investors to overvalue information that confirms their pre-existing
beliefs?
1.Confirmation Bias
2.Familiarity Bias
3.Self-attribution Bias
4.Emotional Gap
Answer: 1. Confirmation Bias
Explanation: Confirmation bias causes investors to selectively favor information
that aligns with their views.
110. True/False Question:
- Familiarity bias encourages diversification by favoring investments in well-known
assets.
Answer: False
Explanation: Familiarity bias often leads to poor diversification as investors stick to
familiar options.
111. Scenario-based Question:
- An investor holds a poorly performing stock, hoping it will eventually recover despite
contrary evidence. What bias does this illustrate?
1.Loss Aversion
2.Herd Behavior
3.Anchoring
4.Confirmation Bias
Answer: 3. Anchoring
Explanation: Anchoring occurs when past prices influence current decisions,
regardless of changing fundamentals.
Monetary Policy and Inflation

23. 112. Definition-based Question:
- What monetary policy tool involves central banks buying or selling government
securities?
1.Open Market Operations (OMO)
2.Interest Rate Adjustments
3.Reserve Requirements
4.Currency Pegging
Answer: 1. Open Market Operations (OMO)
Explanation: OMO regulates money supply by influencing short-term interest
rates and liquidity.
113. True/False Question:
- Higher inflation typically results in lower interest rates.
Answer: False
Explanation: Central banks often raise interest rates to combat inflation and maintain
economic stability.
114. Scenario-based Question:
- A central bank reduces reserve requirements to stimulate economic activity. What is
the likely effect?
1.Increased Money Supply
2.Reduced Credit Availability
3.Lower Investment Levels
4.Higher Unemployment
Answer: 1. Increased Money Supply
Explanation: Lower reserves allow banks to lend more, expanding the money
supply and boosting economic activity.
Mergers and Acquisitions (M&A)
115. Definition-based Question:
- What term describes combining two companies of equal size to form a new entity?
1.Merger of Equals
2.Acquisition
3.Horizontal Integration
4.Vertical Consolidation
Answer: 1. Merger of Equals
Explanation: A merger of equals occurs when two firms of similar size create a
new company jointly.
116. True/False Question:
- Hostile takeovers occur with the consent of the target company’s management.
Answer: False
Explanation: Hostile takeovers proceed without management approval, often through
direct shareholder offers.
117. Scenario-based Question:
- A company acquires a competitor to gain market share and reduce competition. What
type of merger is this?
1.Horizontal Merger
2.Vertical Merger
3.Conglomerate Merger

24. 4.Reverse Merger
Answer: 1. Horizontal Merger
Explanation: Horizontal mergers involve companies in the same industry, aiming
to consolidate market position.
Capital Budgeting and Valuation
118. Definition-based Question:
- Which metric measures the profitability of an investment relative to its cost?
1.Profitability Index (PI)
2.Payback Period
3.Internal Rate of Return (IRR)
4.Discounted Cash Flow (DCF)
Answer: 1. Profitability Index (PI)
Explanation: PI compares the present value of cash inflows to the initial
investment, indicating project viability.
119. True/False Question:
- Projects with higher IRRs are always preferable regardless of NPV.
Answer: False
Explanation: IRR should be evaluated alongside NPV; conflicting results require
prioritizing value maximization.
120. Scenario-based Question:
- A firm rejects a project with an IRR of 8% when its cost of capital is 10%. What
rationale supports this decision?
1.Negative Payback Period
2.Positive NPV
3.Insufficient Return
4.High Liquidity Risk
Answer: 3. Insufficient Return
Explanation: IRR below the cost of capital indicates the project does not meet
the required return threshold.