Concept 6

Question 1

If a manager changes his investment strategy, should he acquire written notice from customer first or should he promptly inform the client after the change

Answer 1

Standard V(B) Communication with Clients and Prospective Clients requires prompt disclosure of any change that might significantly affect the manager’s investment processes. The disclosure need not be in writing.

Question 2

If a candidate changes his mother’s account for tax purpose, but does not do that for other clients, does he violate fair dealing?

Answer 2

No, tax is different for everyone, acting the same on everyone might not be for their best interest

Question 3

Under GIPS, what does total firm asset include?

Answer 3

Discretionary and non-discretionary accounts, fee-paying and non-fee-paying accounts.

Question 4

If a candidate change recommendation from “buy” to “sell”. then another customer immediately called to buy the share, what should he do?

Answer 4

He may accept the order but must advise the customer of the change in recommendation before accepting the order. No written permission is required

Question 5

Can candidate mimic client’s account action on his own account?

Answer 5

Yes, as long as they do not harm client’s interest

Question 6

If a company want to make a purchase, and a candidate possess material non public information that the purchase should not be executed, what should he do?

Answer 6

He should not act on it. He should not put the company on restriction list because that would also be “acting” on the information. He should contact the source of the information to urge them to make the information public, otherwise would make the purchase anyway.

Question 7

Contrarian technical analyst

Answer 7

Anticipate bearish market if indicators are bullish, vice versa

Question 8

Put-call ratio

Answer 8

Put option means people expect price to lower, thus high put-call ratio means a bearish market

Question 9

Volatility index

Answer 9

High VIX indicates investor fear the drop of stock price, indicates a bearish market

Question 10

Low mutual fund cash position

Answer 10

Low cash position indicates aggressive investing -> bullish market

Question 11

Margin debt

Answer 11

Increase in margin debt indicates aggressive borrowing to buy, thus bullish market

Question 12

Elasticity approach (exchange rate change)

Answer 12

Under the elasticities approach, a currency depreciation will lead to a greater reduction in a trade deficit when export demand and/or import demand are more elastic.

Question 13

Open market operation

Answer 13

Central buys or sells security.

When central bank buy stocks, cash replace stock position, money supply increase and interest rate decrease

Question 14

Most used monetary tool for central bank to control money supply

Answer 14

Open market operation

Question 15

Reserve requirement

Answer 15

Percentage of reserve bank need to keep for deposits. Lower reserve requirement increase money supply and lower interest rate.

Question 16

Policy rate

Answer 16

Also discount rate or refinancing rate. It is the rate that banks can borrow money from fed.
Lower rate makes it easier to borrow money, decrease interest rate overall

Question 17

Short run aggregate supply curve

Answer 17

Upward sloped, Output(real gdp, x axis) v.s. Price level (y axis)

Question 18

Long run aggregate supply curve

Answer 18

Vertical, Output(real gdp, x axis) v.s. Price level (y axis)

Question 19

What’s the effect of increased money supply on AD and AS

Answer 19

It will increase aggregated demand

Question 20

A natural monopoly is most likely to exist when

Answer 20

economies of scale are great

Question 21

Report of extraordinary item

Answer 21

Separately in income statements

Question 22

How is interest expense categorized for manufacturing company and financial service company?

Answer 22

Interest expense is shown as a non-operating component of net income for a manufacturing company but would typically be classified as an operating expense for a financial services company.

Question 23

If a 4M bond is converted into 6M common stock, how should that be recorded on cash flow statement?

Answer 23

Conversion of bonds into common stock is a non-cash transaction, but the conversion should be disclosed in a footnote to the statement of cash flows.

Question 24

Should we use coupon rate or market rate of newly issued debt to estimate debt cost of capital

Answer 24

Market rate

Question 25

What risk does beta measure

Answer 25

Systematic risk

Question 26

What risk does standard deviation measure

Answer 26

Total risk

Question 27

Short sale

Answer 27

Short seller 1) simultaneously borrows and sells securities through a broker 2) must return securities at the request of the lender or when short sale close out 3) must keep a portion of the proceeds of the short sale on the account

Question 28

Is price of a lower-coupon payment bond more or less sensitive to interest rate change compared to a higher-coupon bond?

Answer 28

Lower coupon payment is more sensitive, since higher coupon bonds always pay same coupon no matter the interest rate.

Question 29

Positive convexity

Answer 29

Bend inward, default bond yield curve

Question 30

Price yield curve

Answer 30

It's curved inward (positive convexity), thus for same percent change, decrease would result in a larger price increase compared to increase would result in the price decrease

Question 31

Forward rate curve | What's the next point on the curve for 2y2y?

Answer 31

Plots forward rates in years. | The next point would be 2 year rate 3years from now

Question 32

In matrix pricing for illiquid bonds, should we use bonds with higher liquidity or similar liquidity?

Answer 32

Matrix pricing for untraded or infrequently traded bonds should be based on yields of more frequently traded bonds with similar credit ratings.

Question 33

1000 bond is trading for 89.14 , what's the flat price

Answer 33

$891.4

Question 34

Benefit of derivative market

Answer 34

1. Provide price information 2. Allow risk to be managed and shifted among market partificpants 3. reduce transactions costs

Question 35

Under Standard V(C) Record Retention, should records be kept in hard copies or is electronic copy acceptable?

Answer 35

Electronic copies are ok

Question 36

If clients have confidential information that might relate to illegal activities, how should candidate act?

Answer 36

In the case of illegal activity, candidate have a legal obligation to report the activity. Ideally, he should consult with his employer first about what actions he may be required to take. Seeking the advice of outside counsel as to whether he has such an obligation under local law and whether the activity is indeed illegal is the one permitted under the Standard.

Question 37

Under Code and Standard, can one report individual account instead of composite?

Answer 37

Individual account performance is permitted and no minimum number of years is recommended

Question 38

Quintile

Answer 38

Distribution divided into 5 groups

Question 39

Subjective probability

Answer 39

Subjective probability is based on personal judgement.

Question 40

empirical probability

Answer 40

Based on historical data

Question 41

Key assumption of technical analysis

Answer 41

Market price reflect both rational and irrational activity Investor behavior is reflected in trends and patterns. Patterns tends to repeat.

Question 42

Elasticity of an perfectly inelastic supply and perfectly elastic supply

Answer 42

For perfect inelastic, elasticity = 0 For perfect elastic, elasticity = infinity Think of demand change = supply change * elasticity. For perfect inelastic, demand change = 0, for perfect elastic, demand change = infinity

Question 43

Law of diminishing return

Answer 43

Determine the upward sloping portion of the short run supply curve

Question 44

Return to scale

Answer 44

Determine the long run supply curve

Question 45

Marginal revenue

Answer 45

Note, it is the increase in revenue (NOT PROFIT) for an additional unit

Question 46

Free trade areas

Answer 46

All barriers to import and export of goods and services among member countries are removed

Question 47

Customs Union

Answer 47

1. All barriers to import and export of goods and services among member countries are removed 2. All countries adopt a common set of trade restrictions with non members

Question 48

Common market

Answer 48

1. All barriers to import and export of goods and services among member countries are removed 2. All countries adopt a common set of trade restrictions with non members 3. All barriers to the movement of labor and capital goods among member countries are removed

Question 49

Economic Union

Answer 49

1. All barriers to import and export of goods and services among member countries are removed 2. All countries adopt a common set of trade restrictions with non members 3. All barriers to the movement of labor and capital goods among member countries are removed 4. Member countries establish common institutions and economic policy for the union

Question 50

Monetary union

Answer 50

1. All barriers to import and export of goods and services among member countries are removed 2. All countries adopt a common set of trade restrictions with non members 3. All barriers to the movement of labor and capital goods among member countries are removed 4. Member countries establish common institutions and economic policy for the union 5. Member countries adopt a single currency

Question 51

retrospectively

Answer 51

Directed to the past

Question 52

Is change from LIFO to FIFO conducted retrospectively or prospectively?

Answer 52

Prospectively, no adjustments are made to the prior periods

Question 53

Assumption of IFRS statement

Answer 53

In the IFRS framework, the two assumptions that underlie the preparation of financial statements are the accrual basis and the going concern assumption.

Question 54

Capitalizing cost and income variability

Answer 54

Capitalizing costs tends to smooth earnings, thus reduce income variability

Question 55

Declaration date

Answer 55

The data board of directors approves dividend payment

Question 56

Ex-dividend date

Answer 56

The first day a share of stock trades without dividend. It is the cut-off date for receiving dividend. Occur two days before holder of record date

Question 57

Holder of record date

Answer 57

Date on which shareholders of record are designated to receive dividends

Question 58

Payment date (dividend)

Answer 58

Date when dividend checks are mailed out

Question 59

What if investor's willingness to take risk greater than his ability to take risk?

Answer 59

The advisor’s assessment of the client’s risk tolerance in the IPS should reflect the client’s ability to bear investment risk.

Question 60

``` Given Jan 1, 20X1 Beginning portfolio value $10 million Jul 1, 20X1 Account value $11.2 million Jul 1, 20X1 Deposit of cash $1.2 million Jan 1, 20X2 Account value $12.5 million Jan 1, 20X2 Withdrawal of cash $0.6 million Dec 31, 20X2 Account value $15 million Calculate manager's performance ```

Answer 60

Since the portfolio manager is not directing the flow of cash into and out of the account, the time-weighted annual rate of return is the appropriate performance measure. Calculate the 2-year holding period return +1, then take the square root and subtract 1 to get the annual time-weighted rate of return: [(11.2 / 10)(12.5 / 12.4)(15 / 11.9)]1/2 – 1 = 19.29%.

Question 61

Statutory voting

Answer 61

a minority shareholder could not elect any board members based only on their share voting rights. In statutory voting, if you owned 50 shares and were voting on six board positions, you could cast 50 votes for each board member, for a total of 300 votes. You could not cast 20 votes for each of five board members and 200 for the sixth.

Question 62

Modified duration in terms of Macaulay duration

Answer 62

Modified duration = Macaulay duration / (1 + YTM)

Question 63

Notching

Answer 63

“Notching” refers to the credit rating agency practice of assigning ratings to debt issues that differ from the issuer’s credit rating.

Question 64

Duration gap

Answer 64

a difference between a bond’s Macaulay duration and the bondholder’s investment horizon.

Question 65

Management fee for Fund of Fund?

Answer 65

The fee may actually be substantial since, in addition to paying the manager of the FOF, a fee must be paid to each hedge fund within the FOF.

Question 66

Private investment in public equities

Answer 66

Private investment in public equities refers to a private equity firm providing equity financing to publicly traded companies.