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Series 66 > 66-12 > Flashcards

66-12 Flashcards

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Series 66 flashcards
1
Q

_________ stock pays higher than average dividends.

A

Income

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2
Q

What is the proper order of liquidation for a corporation at bankruptcy?

A

Unpaid workers, IRS, secured creditors, unsecured creditors, preferred, and then common.

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3
Q

What is the formula for calculating current yield?

A

Annual Interest ÷ Current Market Price

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4
Q

True or False: When interest rates go up, bonds prices go up, and when interest rates go down, bond prices go down.

A

False

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5
Q

Given a yield change, ____________ bonds move more in price.

A

long-term

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6
Q

Define real interest rate (real rate of return).

A

Interest rate minus the inflation rate (e.g., Bond yielding 8% when inflation is 3% has a real interest rate of 5%).

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7
Q

Which interest rates are generally more volatile?

A

short-term

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8
Q

Describe inflation or purchasing power risk.

A

The risk that today’s investment will not be worth as much when the money is received in the future.

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9
Q

What orders benefit the entire syndicate by percentage of liability?

A

group net orders

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10
Q

Stop and stop-limit orders are triggered when a round lot trades at, or through, the _____________.

A

stop price

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11
Q

If long stock, a sell stop order can be used to limit ___________ risk.

A

downside

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12
Q

If short stock, a buy stop order can be used to limit _________ risk.

A

upside

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13
Q

Stop orders become _________ orders once triggered/activated.

A

market

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14
Q

Stop-limit orders become ________ orders once triggered/activated.

A

limit

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15
Q

If a stop order is activated, at what price will the trade be executed?

A

the next traded price after activation

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16
Q

Do stop orders guarantee a specific price when buying or selling?

A

no

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17
Q

True or False: Stop-limit orders are guaranteed execution if the trigger is touched.

A

False

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18
Q

Which market is the decentralized, negotiated market?

A

OTC

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19
Q

How is a firm acting if it is trading for, or from, its own inventory?

A

as a principal/dealer

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20
Q

How is a firm acting if it effects trades on behalf of its customers, without taking the other side of the trade?

A

agent or broker

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21
Q

The _____________________ has the authority to regulate margin requirements.

A

Federal Reserve Board

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22
Q

____________ governs the extension of credit by BDs.

A

Regulation T

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23
Q

Does the payment date requirement of Regulation T apply to cash or margin accounts?

A

both. payment is required in 5 days

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24
Q

A _______-based index measures the market as a whole.

A

broad

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25
Q

A _______-based index measures the movement of a particular sector or industry.

A

narrow

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26
Q

___________________ is the balancing of investment classes according to an investor’s investment objectives.

A

asset allocation

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27
Q

______ is the measure of an asset’s volatility compared to the market as a whole.

A

Beta

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28
Q

What is the beta of the market (S&P 500)?

A

1

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29
Q

If an asset outperforms the market when prices are up/underperforms when prices are down, its beta is _____ than 1.00.

A

greater

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30
Q

This tests a company’s ability to pay its current liabilities with its current assets but does not include inventory.

A

Quick Asset Ratio ( The acid test)

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31
Q

(Current Assets - ____________) ÷ Current Liabilities = Quick Asset Ratio (or Acid Test)

A

inventory

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32
Q

Working Capital, Current Ratio, and the Quick Asset Ratio (Acid Test) are examples of ____________ ratios.

A

liquidity

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33
Q

To find a stock’s current yield, the formula is: ____________ ÷ ____________

A

Annual Dividend ÷ Current Market Price

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34
Q

What is the Capital Asset Pricing Model (CAPM)?

A

A model of the relationship between expected risk and expected return

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35
Q

True or False: According to CAPM, a security’s return equals a risk-free return (T-Bill return) plus a risk premium.

A

True

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36
Q

True or False: Inflation is a persistent rise in the general level of prices.

A

true

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37
Q

Would inflationary periods be characterized by rising or falling interest rates?

A

rising

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38
Q

The _______________________ is often considered the most important measure of inflation.

A

CPI - Consumer Price Index

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39
Q

The ________________ the duration, the greater the bond’s price sensitivity.

A

longer

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40
Q

Define duration.

A

The measure, expressed in years, of a bond’s price sensitivity to interest rate changes

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41
Q

May a cash account be opened without the customer’s signature?

A

yes

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42
Q

May a margin account be opened without the customer’s signature?

A

no

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43
Q

True or False: The initial transaction in a margin account requires a written margin agreement promptly after the trade.

A

True

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44
Q

A securities firm that executes trades for its own account or the accounts of others is deemed a _______________.

A

broker-dealer

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45
Q

__________ value is the dollar amount to be invested today to meet a specific dollar objective at a set future point.

A

present

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46
Q

__________ value determines how much a dollar amount invested today will be worth at a set point in the future.

A

future

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47
Q

What is used to determine how a given present value will become a needed future value.

A

The Internal Rate of Return (IRR)

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48
Q

$10,000 has become $80,000 in 36 years. What is the internal rate of return?

A

The money doubled every 12 years. The 10 grew to 20, the 20 to 40, and the 40 to 80. Using the Rule of 72, 72 ÷ 12 = 6%.

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49
Q

Assuming a 12% rate of return, how long will it take $50,000 to double?

A

6 years. Using the Rule of 72, 72 is divided by the rate of return to determine the number of years (72 ÷ 12 = 6 years).

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50
Q

Modern Portfolio Theory (MPT) focuses on differing __________ of assets rather than on _____________ securities.

A

classes of assets rather than individual securities

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51
Q

What are the three main concepts underlying the Modern Portfolio Theory?

A

Expected return, standard deviation, and correlation

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52
Q

Define expected return.

A

The possible return of an asset multiplied by the likelihood of occurrence

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53
Q

Standard deviation is a measure of the dispersion of ____________ returns.

A

expected

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54
Q

What is the likelihood of an investment’s return falling within 1, 2, and 3 standard deviation units?

A

67% within 1 standard deviation, 95% within 2 standard deviations, and 99% within 3 standard deviations

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55
Q

What is used as the basic measure of risk for an investment?

A

standard deviation

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56
Q

The greater the dispersion of historical returns of a security, the _________ its standard deviation

A

higher

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57
Q

______________ measures the degree to which the movements of two variables are related.

A

correlation

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58
Q

If two investments closely track one another, this is referred to as ___________ correlation.

A

positive

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59
Q

If two investments go in opposite directions from one another, this is referred to as ___________ correlation.

A

negative

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60
Q

If there is no relationship between the movement of two investments, they are considered to be _______________.

A

uncorrelated

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61
Q

True or False: Perfect negative correlation is -1.00, while a perfect positive correlation is 1.00.

A

True

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62
Q

True or False: Securities with a correlation coefficient of zero would be considered uncorrelated.

A

True

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63
Q

MPT has found that having asset classes with a slight ___________ correlation provides the best long-term performance.

A

negative

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64
Q

What is the efficient frontier?

A

The line representing portfolios (excluding risk-free alternatives) showing the lowest risk for a given level of return

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65
Q

Strategic asset allocation assumes that the markets are ____________.

A

efficient

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66
Q

True or False: Tactical asset allocation is changing a portfolio’s asset mix because of market and economic factors.

A

True

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67
Q

True or False: With a buy and hold strategy, investors are consistently rebalancing their portfolios.

A

False

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68
Q

Tactical asset allocation assumes that markets are ______________.

A

inefficient

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69
Q

What is another name for diversifiable risk?

A

non-systematic risk

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70
Q

What is another name for non diversifiable risk?

A

systematic

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71
Q

True or False: Diversification is one method by which an investor may avoid non-systematic risk.

A

True

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72
Q

What type of risk does beta measure?

A

systematic/non-diversifiable

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73
Q

If a security’s beta is more than 1, is it considered more or less volatile than the market as a whole?

A

more. The higher the Beta, the higher the volatility

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74
Q

What types of securities would generally have a high beta?

A

growth stocks

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75
Q

What types of securities would generally have a low beta?

A

defensive stocks

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76
Q

During a declining market, would you expect a high beta security to out perform or under perform the market as a whole?

A

under perform

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77
Q

During a rising market, would you expect a low beta security to out perform or under perform the market as a whole?

A

under perform

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78
Q

True or False: Alpha represents an investment’s actual return in excess of its expected return.

A

true

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79
Q

A stock with a positive alpha would generally be considered a _________ opportunity by an analyst.

A

buying

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80
Q

Another name for a security’s risk-adjusted return is its ________.

A

alpha

81
Q

List some forms of business risk when investing in individual equity securities.

A

Poor management, obsolete products, changing market conditions

82
Q

True or False: The longer an investor’s time horizon, the more concerned he is with market fluctuations.

A

False

83
Q

Do long-term bonds have higher or lower interest-rate risk?

A

higher

84
Q

What is the risk of having an excessive portion of a portfolio invested in one particular security or asset class?

A

concentration risk

85
Q

____________ risk is the inability to sell an investment easily.

A

liquidity

86
Q

What uses computer simulations to present random outcomes of an investment strategy?

A

Monte Carlo Simulation

87
Q

What is considered an optimal portfolio?

A

One that has the highest expected return given the client’s tolerance for risk

88
Q

What measures risk-adjusted return?

A

Alpha and the Sharpe Ratio

89
Q

Which type of risk is non diversifiable?

A

market risk

90
Q

Is market risk considered a form of diversifiable or non-diversifiable risk?

A

non-diversifiable

91
Q

Is business risk considered a form of diversifiable or non-diversifiable risk?

A

diversifiable

92
Q

Identify the risk of existing bond prices declining while interest rates are rising.

A

interest rate risk

93
Q

To determine a bond’s real interest rate, the bond’s yield is subtracted by the rate of ___________.

A

inflation

94
Q

True or False: A low beta security would be expected to rise more than a high beta security in a bull market.

A

False

95
Q

An investor’s net return is the gross return minus ________ paid.

A

taxes

96
Q

Define holding period return.

A

The total return received from holding an asset or portfolio of assets

97
Q

A security has appreciated from $10 to $15 over 3 months and has paid no dividend. What is the annualized return?

A

200%, which is calculated by multiplying the holding period return (50%) times 4 quarters

98
Q

What is the formula for determining a bond’s current yield?

A

Annual interest ÷ current market value of the bond

99
Q

What is the formula for determining a stock’s current yield?

A

Annual dividend ÷ current market value of the stock

100
Q

True or False: The longer a bond’s duration, the less sensitive the bond’s price will be to changes in interest rates.

A

False. The longer the duration, the greater a bond’s price sensitivity to changes in interest rates.

101
Q

Would investing in stocks or bonds be a better hedge against inflation?

A

stocks

102
Q

An investor buys stock that returns 2% for the year instead of a T-Bond yielding 6%. The ______________ cost is 4%.

A

opportunity

103
Q

Identify the acronym: CPI

A

Consumer Price Index

104
Q

When acting in a ____________ capacity, a firm is assuming risk.

A

principal

105
Q

When acting in an ________ capacity, firms assist customers, but do not assume risk.

A

agency

106
Q

Describe the inverse relationship between market interest rates and the prices of existing bonds

A

interest rates go up, bond prices go down.

interest rates drop, bond prices go up

107
Q

What type of mean is used to calculate the expected return?

A

The weighted arithmetic mean

108
Q

An investment earns 10%, 50%, and 30% in three years. How would the annualized average rate of return be calculated?

A

When calculating an annualized rate of return over time, the geometric mean is used.

109
Q

Identify the acronym: CAPM

A

Capital Asset Pricing Model

110
Q

Identify the acronym: MPT

A

Modern Portfolio Theory

111
Q

What rule can be used to determine how long it takes for an amount of money to double at a given rate of return?

A

The rule of 72

112
Q

What rule can be used to determine the annual rate of return needed for funds to double if given a number of years?

A

The rule of 72

113
Q

Jim invested $25,000 in an annuity with a 6% return. How long will it take for the money to double?

A

12 years (72/6)

114
Q

12 years ago, Tina invested $25,000 which has now grown to $100,000. What is the annual growth rate of her investment?

A

12 %.

Rule of 72 says divide 72 by the years needed for money to double. In 12 years, money has doubled twice (72 ÷ 6 = 12%).

115
Q

_________ value projects what an investment will be worth at some point in the future.

A

future

116
Q

__________ value is the amount of money that must be invested today to result in a certain sum at a future time.

A

present

117
Q

A bond’s inflation-adjusted rate of return may also be referred to as the _______ interest rate.

A

real

118
Q

True or False: Tactical asset allocation is considered a passive asset allocation approach.

A

False

119
Q

True or False: Strategic asset allocation is considered an active asset allocation approach.

A

False

120
Q

Do those who favor passive strategies believe markets are efficient or inefficient?

A

efficient

121
Q

Do those who favor market timing (active strategies) believe markets are efficient or inefficient?

A

inefficient

122
Q

What is an advantage to buy and hold portfolio management?

A

Transaction costs and tax consequences are minimized.

123
Q

Identify the risk: Investors miss out on receiving a better return by placing their funds elsewhere.

A

opportunity risk

124
Q

Identify the risk: A particular enterprise may not perform well due to poor management or increased competition.

A

business risk

125
Q

Is indexing considered an active or passive portfolio management strategy?

A

passive

126
Q

What method of investing is characterized by regularly investing a set amount of money, regardless of share prices?

A

dollar cost averaging

127
Q

Describe a growth investor.

A

One seeking stocks of companies with an above-average growth rate, high P/E ratios, and low dividend payout ratios

128
Q

Describe a value investor

A

One seeking stocks that are undervalued in relation to their earnings and have low P/E ratios

129
Q

How is market capitalization (cap) determined?

A

A company’s current share price multiplied by the number of shares outstanding

130
Q

What are Large-Cap stocks?

A

Stocks of mature companies with a long history of dividend payments

131
Q

What are Mid-Cap stocks?

A

Stocks of companies that are more volatile and growth-oriented than the Large-Cap stocks

132
Q

What are Small-Cap stocks?

A

Typically stocks of new companies with more volatility, but more growth potential as well

133
Q

What are Micro-Cap stocks?

A

Stocks of emerging companies that would generally be suitable only for speculative investors

134
Q

Over the last 3 months, Jim’s stock rose from $50 to $51 and he received a $.25 dividend. What is the annualized return?

A

The 3-month return is 2.5% ($1.25 ÷ $50). A quarterly return may be annualized by multiplying by 4 (2.5% x 4 = 10%).

135
Q

Sue bought a 6% bond at par. One year later, her bond’s value has fallen to $970. What is her annual return?

A

Sue received the 6% rate of interest, but her bond lost 3% of its value. (-$30 + 60) ÷ $1,000 = 3%.

136
Q

A bond is yielding 8%, when the rate of inflation is 3%. What is the real interest rate?

A

5%

137
Q

Bond A yields 7.5% when inflation is 3%. Bond B yields 8% when inflation is 4%. Which has a higher real interest rate?

A

Bond A, 4.5%

138
Q

What is a principal trade?

A

A trade involving a firm (BD or IA) buying or selling securities for its own account at its own risk

139
Q

“A dollar received today is worth more than a dollar received tomorrow” describes what concept?

A

the time value of money

140
Q

If a bond is trading at a discount to its value based on DCF, will an investor earn more or less than a comparable bond?

A

more

141
Q

If a bond is trading at a premium to its value based on DCF, will an investor earn more or less than a comparable bond?

A

less

142
Q

What are two assumptions of MPT?

A

Investors want to minimize risk and maximize returns

143
Q

What is the name for the graph of optimal portfolios?

A

The efficient frontier

144
Q

Which would have the least risk—large-, mid-, or small-cap companies?

A

large

145
Q

Which would have the most risk—large-, mid-, or small-cap companies?

A

small

146
Q

True or False: Systematic rebalancing involves buying and selling on a periodic basis.

A

true

147
Q

True or False: Systematic rebalancing assumes markets are inefficient.

A

false

148
Q

What is an efficient market?

A

A market in which prices reflect all known information; therefore, nothing will be overvalued or undervalued.

149
Q

Name the three forms of market efficiency.

A

Strong-, Semi-Strong and Weak-Form

150
Q

True or False: In a weak-form efficient market, technical analysis will be useful.

A

False, only fundamental analysis is

151
Q

True or False: Strong-form market efficiency advocates believe they can beat the market.

A

False

152
Q

Which form of market efficiency declares only insiders can regularly beat the market?

A

semi-strong

153
Q

What type of trading strategy would be used if you believe markets are efficient?

A

Passive strategies, such as indexing or systematic rebalancing

154
Q

True or False: The S&P 500 is a large-cap index

A

True

155
Q

True or False: The S&P 400 is a large-cap index.

A

False, it is a mid-cap index

156
Q

What type of trading strategy would be used if you believe markets are inefficient?

A

Active strategies, such as tactical asset allocation or sector rotation

157
Q

Define sector rotation.

A

A strategy that anticipates the next turn in the business cycle and shifts assets into the sectors that will benefit.

158
Q

Define capital structure.

A

A company’s issuance of debt and equity securities (both common and preferred stocks) to finance operations

159
Q

What are two measures of liquidity?

A

Current ratio and the quick asset ratio (acid test) both measure a company’s liquidity.

160
Q

What is the difference between the current ratio and the quick asset ratio?

A

The quick asset ratio is more stringent since it excludes inventory from the current assets.

161
Q

A company with more debt than equity outstanding is considered ____________.

A

leveraged

162
Q

True or False: A bottom up approach to investing uses the economy as a main factor in determining which stocks to buy.

A

False, bottom up investing uses company specific items, such as earnings and dividend payments to pick stocks.

163
Q

_______ investors look for stocks of companies that are intrinsically undervalued.

A

value

164
Q

What are some of the characteristics of a value stock?

A

Low P/E ratios, history of profitability, high dividend payout, and low market-to-book ratio

165
Q

What is the formula for the P/E ratio?

A

Price ÷ EPS (Earnings Per Share)

166
Q

_______ investors are concerned with a company’s future earnings potential.

A

growth

167
Q

The __________ style of investing is one that bets against market trends.

A

contrarian

168
Q

What is a dollar-weighted return?

A

A dollar-weighted return is a geometric mean (average) used to measure how a portfolio performed over time.

169
Q

What is a time-weighted return?

A

A time-weighted return is a geometric mean (average) that eliminates the effect of varying cash inflows (dividends).

170
Q

What is a major disadvantage when using an arithmetic mean to measure investment performance?

A

Arithmetic means (averages) can misrepresent compounding effects on an investment’s return.

171
Q

True or False: Systematic risk may be avoided through diversification.

A

False

172
Q

Market, interest rate, and inflation risk are all types of ___________ risk.

A

systematic

173
Q

Business, regulatory, political, and liquidity risk are all types of ____________ risk.

A

unsystematic

174
Q

What is the risk that certain circumstances or factors may have a negative impact on the profitability of a company?

A

business risk

175
Q

What is the risk of foreign investors losing money due to changes with a country’s government or regulatory environment?

A

political risk

176
Q

What is the risk that investors may be unable to dispose of a securities position quickly and at a fair price?

A

liquidity risk

177
Q

True or False: Investors who are planning to hold bonds until maturity have no risk

A

False. Opportunity risk (the risk of missing out on a superior investment) would be a risk this type of investor faces.

178
Q

Define reinvestment risk.

A

The risk that an investor will not be able to reinvest their principal at the same interest rate.

179
Q

True or False: A country with high interest rates will generally have a stronger currency.

A

True

180
Q

Define currency risk.

A

The risk that foreign investments will be worth less in the future due to changes in exchange rates.

181
Q

What would happen to the U.S. trade deficit if the dollar is weakening?

A

A trade deficit would be shrinking as U.S. goods would be cheaper for foreign consumers

182
Q

To what risk would structured debt products (e.g., CMOs) be subject?

A

Complexity risk is high in structured debt investments, such as CMOs.

183
Q

What is the formula for the Sharpe Ratio?

A

(Return on Investment - Risk-Free Return) ÷ Standard Deviation

184
Q

What is the Sharpe Ratio used to determine?

A

The Sharpe Ratio is used to determine if returns are from wise investments or the result of excess risk.

185
Q

Buy limit orders are placed ________ the market.

A

below

186
Q

Sell limit orders are placed ________ the market.

A

above

187
Q

How is a company’s market capitalization calculated?

A

(Number of common shares outstanding) x (Market price of shares)

188
Q

Name four asset classes.

A

Stocks, Bonds, Real Estate, Cash

189
Q

Equities (stocks), fixed income (bonds), real estate, money markets (cash) are examples of _____________.

A

asset classes

190
Q

True or False: The S&P 500 is an asset class.

A

False

191
Q

What return will an investment have if its net present value is greater than zero?

A

positive return

192
Q

What return will an investment have if its net present value is less than zero?

A

negative return

193
Q

What return will an investment have if its net present value is equal to zero?

A

zero

194
Q

What is required to make the dollar weighted return and the time weighted return equal?

A

Remove or subtract deposits into and withdrawals out of the portfolio

195
Q

True or False: Dollar weighted return (DWR) takes into account the deposits into or withdrawals out of the portfolio.

A

true

196
Q

What is the present value of an annuity that pays $2,000 per year and earns 5% per year?

A

$40,000 = $2,000/.05

197
Q

A ____________ is an annuity that never stops paying money.

A

perpetuity

198
Q

What is a Perpetuity?

A

an annuity that pays out forever

Series 66 (12 decks)

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