Ch 3 Practice Test Flashcards
One implication of the Brinson study is that investors should:
a. ignore market timing when managing portfolios
b. focus on asset allocation with less attention given to securities selection and market timing.
c. ignore market timing and securities selection when managing portfolios.
d. ignore securities selection, and concentrate on asset allocation with less attention given to market timing.
b. focus on asset allocation with less attention given to securities selection and market timing.
The implication form the Brinson study is to give considerable attention to asset allocation and less attention to securities selection and market timing.
A U.S. dollar- dominated instrument issued by foreign branches of major American and foreign commercial banks is a:
a. negotiable certificate of deposit
b. yankee certificate of deposit
c. eurodollar certificate of deposit
d. banker’s acceptance
c. eurodollar certificate of deposit
A eurodollar CD is a U.S. dollar-denominated CD issued by foreign branches of major US and foreign commercial banks.
The relative performance of different asset classes is dependent on the holding period selected. Based on historical performance data, which class of assets would be likely to provide the greatest pretax total return over the long term?
a. small company stocks
b. large company stocks
c. long-term gov bonds
d. long term corp bonds
a. small company stocks
According to Ibbotsondata, which one of the following investments generally has the lowest standard deviation?
a. large cap stocks
b. intermediate term gov bonds
c. long term corp bonds
d. treasury bills
d. treasury bills
Investment professional Bill Winters received teh latest long-term total return data for different asset classes. He sees that common stocks returned 10.3% compounded with standard deviation of 19.7; T-bills had a 3.3% return with a standard deviation of 3.1. What is the expected return of a portfolio of 60% stocks and 40% t-bills?
a. 6.18%
b. 9.18%
c. 3.95%
d. 7.5%
d. 7.5%
(.6 x 10.3%) + (.4 x 3.3%) = 7.5%
Tactical asset allocation attempts to:
a. utilize index funds for the core positions, and the satellite portion is then invested to take advantage of opportunities to add return.
b. create efficient portfolios that provide the best balance risk and return over the long term.
c. move investments form those that appear overvalued to those that appear undervalued.
d. optimize the risk/return balance on long term portfolios.
c. move investments form those that appear overvalued to those that appear undervalued.
Tactical asset allocation uses securities selection and market timing techniques to shift assets form those perceived to be overvalued to those that are perceived to be undervalued.
Which one of these is a unique risk associated with international bonds?
a. currency (exchange rate) risk
b. call risk
c. interest rate risk
d. purchasing power risk
a. currency (exchange rate) risk
Money market mutual funds invest in all of the following except:
a. corp bonds
b. commercial paper
c. treasury bills
d. repurchase agreements
a. corp bonds
A mutual fund sales load that is assed on a descending scale if the fund is sold within the first five or six years of purchase is call a:
a. redemption fee
b. level load
c. front-end load
d. contingent deferred sales charge
d. contingent deferred sales charge
A contingent deferred sales charge is a sales load assessed on a descending scale if the fund is sold within the first five or six years of purchase
If the market rate on a coupon bonds similar to Bond A increases, Bond A’s duration will
a. decrease
b. stay the same
c. decrease proportionally to the percentage change in market rates
d. increase
a. decrease
Company XYZ has earnings this year of $1.80 per share, expects earnings next year to increase by 15%, and generally trades at a 10% premium to the S&P 500 index. Currently, the P/E of the S&P 500 index is 20. What is the expected value of XYZ next year?
a. $39.60
b. $45.54
c. $36.00
d. $41.40
b. $45.54
The P/E is correct (20 x 1.10 =22) and is multiplied, correctly, by next year’s earnings (1.80 x 1.15 = $2.07) to get $45.54
22 x 2.07 = 45.54
A US investor owns a bond denominated in Mexican pesos. If the bond earned 8% while the value of the peso increased against the US dollar by 4%, the investor’s total return was:
a. decreased 10% by the strengthening peso
b. increased by the falling dollar
c. decreased 10% by the falling dollar
d. increased by the strengthening peso.
d. increased by the strengthening peso.
Which one of these rates is most directly affected by the Federal Reserve Board?
a. treasury bill rate
b. prime rate
c. federal funds rate
d. market interest rates
c. federal funds rate
One assumption of technical analysis is that:
a. markets are efficient
b. stock prices move randomly
c. stock prices move in trends
d. ratio analysis leads to better stock selection
c. stock prices move in trends
Which one of the following is an activity ratio?
a. current ratio
b. debt to equity ratio
c. return on assets
d. inventory turnover
d. inventory turnover
Two variables with no linear relationship exhibit a correlation of
a. -0.5
b. 1.0
c. -1.0
d. 0.0
d. 0.0
A correlation of o.o means there is no linear relationship between the returns of the two securities. Perfectly positively correlated securities (1.0) move in the same direction and perfectly negatively correlated securities (-1.0) move in opposite directions.
which one of the following approaches to asset allocation tries to identify the asset mix that provides an optimal balance of risk and return for a long investment horizon?
a. strategic
b. tactical
c. core/satellite
d. dynamic
a. strategic
The numerator of the quick ratio is expressed as current assets minus
a. accounts receivable
b. current liabilities
c. accounts payable
d. inventory
d. inventory
The formula for the quick ratio is (current assets - inventory) / current liabilities and is a measure of liquidity
Which one of these risks does not apply to preferred stock?
a. default risk
b. interest rate risk
c. reinvestment risk
d. purchasing power risk
a. default risk
How frequently do mortgage pass-through bonds make payments
a. biennially
b. monthly
c. semiannually
d. annually
b. monthly
How are dividends from REITs taxed?
a. qualified dividend rates
b. short term cap gains
c. long term cap gains
d. ordinary income tax rates
d. ordinary income tax rates
Lily has several accounts with Progress Bank, which is FDIC insured.
- $300,000 in a single account
- $280,000 in a jnt account with her son
- $280,000 in a jnt account with her daughter
- $225,000 in a trad ira
How much FDIC coverage does she have personally on her accounts?
a. $530k
b. $755k
c. $725k
d. $1,005,000
c. $725k
Lily receives personal coverage of $250k for her single account, $225k for her traditional IRA, and is then limited to a total of $250,000 of the $560k combined value int he jnt accounts (due to the like registration).
One risk associated with treasury inflation-protected securities (TIPS) is in the event of deflation, the principle value falls which results in
a. a higher risk of default
b. lower interest payments
c. changes to the SOFR
d. decreases in dividends
b. lower interest payments
one risk of TIPS is that, in the vent of deflation, the principal value falls, which also result in lower interest payments
