Investment Planning Flashcards

Question

Joe purchased 1 share of XO for $80. One year later the stock paid a dividend of $2 and Joe purchased an additional share for $95. Joe sold the stock 1 year later for $110. What is the dollar weighted return? A.35.6% B.17.60% C.18.50% D.53.0%

Answer 1

Solution: The correct answer is B. CF0 = <80> CF1 = <93> (2 - 95) CF2 = 220 (110 x 2) IRR = 17.60%

Answer 2

Solution: The correct answer is D. Beta is really the slope of the line the represents the return of a security relative to the return of the market.

Answer 3

Solution: The correct answer is C. Diversifiable risks are unsystematic risks which include: A, B, C, D, E, F, G. Accounting, Business, Country, Default, Executive, Financial, and Government.

Answer 4

Solution: Sharpe Only: A sector mutual fund with a r-squared (to the S&P 500) of .59 Sharpe and Treynor: Relative risk adjusted performance measures Treynor and Alpha: A well diversified mutual fund with a r-squared (to the S&P 500) of .88 Alpha Only: Absolute risk adjusted performance measures

Answer 5

Solution: The correct answer is C. ER = Rf + B (Rm – Rf) = .03 + 1.5 (.10 - .03) = 13.5

Answer 6

Solution: The correct answer is C. Choices A, B, and D are 3 of the four fundamental means to achieve asset allocation. The fourth option is technical analysis (not listed as an answer choice). Technical analysis uses the historical pricing and volume data to make asset decisions. Both discount cash flow and relative valuation methods are part of fundamental analysis.

Answer 7

Solution: The correct answer is D. None of the above. Even the weak form holds that technical analysis is of no particular value.

Answer 8

Solution: The correct answer is A. Only the weak form accepts Fundamental Analysis as a viable investment approach.

Answer 9

Solution: The correct answer is B. Random Walk is a common nickname for the EMH.

Answer 10

Solution: The correct answer is D. The first key to this question is knowing that the margin requirement is 50%, which is established by the Federal Reserve. So, Holly is required to pay $10 × .50 = $5 in cash and borrow the other $5 per share to make the investment. The question does not reference any margin interest, so it's excluded from the calculation. The second key to this problem is that the Purchase Price in the numerator reflects both the equity contribution of $5 per share and the $5 per share that must be repaid to the broker. The Purchase Price in the denominator only needs to reflect the $5 in equity paid. HPR = (SP - PP +/- CF) / PP HPR = ((11 - 10) + (.25 × 4)) / (10 × .5) HPR = 40%

Answer 11

Solution D

Answer 12

Solution: The correct answer is A. The benefit of the stop-limit order is to ensure you sell (or buy) at prices you'd like, while also ensuring that the trade does not get executed if the price falls (or rises) too high during market gaps (e.g., overnight activity). In this case, since the limit price was set at $25 per share, the trade doesn't get executed (and won't until the price of the stock rises to at least $25, which would result in a recognized $5 loss per share). Thus, no transactions occur and she has no recognized gains or losses. Had she placed a stop order, then the trade would have been immediately executed the next morning at $23 per share, resulting in a $7 recognized loss per share.

Answer 13

Solution: The correct answer is D. A stop limit order is a limit order at $27. Since the stock quickly falls to $23, Jill is likely to still own the stock. The order would have been activated at 27, but it would then be a limit order at $27.

Answer 14

Solution: The correct answer is D. Unissued shares have never been held by investors to be repurchased. There is no such thing as "repurchased" shares. Authorized shares may be unissued or outstanding shares, but not necessarily Treasury shares (which are those the company has repurchased.)

Answer 15

Solution: The correct answer is D. ADRs provide an opportunity for Americans to purchase foreign securities.

Answer 16

Solution: The correct answer is A. C desrcibes a best-effort underwriting

Answer 17

Solution: The correct answer is A. (current price) $20 − (initial equity)$16 = 4 Required Equity: $20 × .35 = $7.00 Margin Call= 7 − 4 = 3 * The stock was purchased for $40 on margin. They needed to pay for 60% of that amount, or $24. $40 - $24 paid, leaves $16 of debt. The current equity is $20 per share, minus the debt of $16.

Answer 18

Solution: The correct answer is D.

Answer 19

Solution: The correct answer is A.

Answer 20

Solution: The correct answer is A. 100 shares × 2/5 = 40 shares; $3 × 5/2 = $7.50

Answer 21

Solution: The correct answer is B. $26M x .08 $2.08M EPS: 2.08 M / 2 M outstanding = 1.04 EPS P/E: 17.68 / 1.04 = 17 Dividend Yield: 1.04 x .40 = .4160 / 17.68 = .0235 * 100 = 2.35%

Answer 22

Solution: The correct answer is E. Step 1: Growth rate N = 5 i = ? = .08 PV = <1.36> PMT = 0 FV = 2 Step 2: current year dividend 2 × (1 + .08) = 2.16 Step 3: Share value = 2.16 ÷ (.12 - .08) = 54 Answer is $54

Answer 23

Solution: The correct answer is D. Use the constant growth dividend model to solve for intrinsic value. The question does not provide the required rate of return, however the capital asset pricing model can be used solve for required rate of return. CAPM: .12 - .03 = .09 * 1.5 = .135 + .03 = .165 = 2 (1.06)/(.165 - .06) = 20.19

Answer 24

Solution: The correct answer is D. The correct answer choice is the application of the following calculation. If a stock is calculated as undervalued using the required rate of return in the constant growth model, it will also exceed the client's required rate of return. Stock 1: v = (1.50 × 1.08) ÷ (.12 - .08), v = $40.50 vs Market Price of $35, therefore this stock is undervalued. You can use the rate of return based on current price formula to double check your calculation: [(1.50 x 1.08)/35] + .08 = 12.62%. This exceeds the expected return of 12%.

Answer 25

Solution: The correct answer is B. The $36.00 per share price is divided by the $3.00 earnings per share resulting in a price/earnings multiplier of 12. The increase of earnings by 25% results in a projected $3.75 earnings next year. Stock Price = 12 × $3.75 = $45.00

Answer 26

Solution: The correct answer is D. There is not a fixed number of shares, so the open end mutual fund determines the value of the end of the day based on redeemed and sold shares.

Answer 27

Solution: The correct answer is B.

Answer 28

Solution: The correct answer is C.

Answer 29

Solution: The correct answer is A. ER = .038 + .72 (.124 − .038) = .0999 A = Actual Return – Er = .105 − .0999 = .005 ER = Rf + B (Rm − Rf)

Answer 30

Solution: The correct answer is B. Money Market Mutual Funds will invest in jumbo CDs (aka Negotiable Certificates of Deposit), but not Bank CDs. Jumbo CDs are typically offered through a brokerage firm and are in amounts of $100,000 or greater. Bank CDs are non-negotiable and are in smaller amounts.

Answer 31

Solution: The correct answer is B. The Real Rate of Return is the return after accounting for inflation, and it does not include the effect of term-to-maturity.

Answer 32

Solution: The correct answer is A. U.S. Treasury Securities Maturity Ranges: Treasury Bills (T-Bills) → Up to 1 year (short-term) Treasury Notes (T-Notes) → 2 to 10 years (medium-term) Treasury Bonds (T-Bonds) → More than 10 years (typically 30 years)

Answer 33

Solution: The correct answer is C. I Bonds (Series I Savings Bonds) are U.S. government savings bonds designed to protect against inflation by offering a variable interest rate tied to inflation. TIPS increase the principle with inflation

Answer 34

Solution: The correct answer is B. While most Private Activity Bonds (PABs) are taxable, some are federally tax-exempt if they finance qualified projects that serve a public purpose.

Answer 35

Solution: The correct answer is D. Income bonds are high risk bonds, usually issued by financially troubled firms. Debentures are unsecured debt. High-yield bonds are lower quality than investment grade and cost the issuer more in interest payments. The airplanes would serve as collateral on the Equipment Trust Certificates.

Answer 36

Solution: The correct answer is A. The taxable equivalent yield for the tax free money market fund is 5.56% .04 ÷ (1 - .28) The taxable equivalent yield is greater than the taxable corporate bond paying 5.4%. The mutual fund and intermediate muni-bond fund are not appropriate given the investor's time horizon.

Answer 37

Solution: The correct answer is A. If you buy long-term bonds when yields are high, you benefit from price appreciation when rates drop. Short-term bonds will mature too quickly, requiring reinvestment at lower future yields.

Answer 38

Solution: The correct answer is C.

Answer 39

Solution: The correct answer is D. Coupon bonds have lower duration than their maturity because they pay periodic interest (which reduces sensitivity to interest rates). A 10-year coupon bond’s duration is typically around 7-9 years, making it a better match for an 8-year horizon than an 8-year coupon bond, which might have a duration of only ~6-7 years.

Answer 40

Solution: The correct answer is D. N=2 i=? PV =<900> PMT=60 FV=1,000 Note-This is an annual bond so it's not necessary to adjust N, i or PMT.

Answer 41

Solution: The correct answer is D. The client is looking for income to begin in 7 years. Therefore anything maturing in 7 years will not provide that income. Zeroes provide no income. She wants something out 25 years, not 20 years. Thus, option "V" is the only one left.

Answer 42

Solution: The correct answer is C. The farming and produce business are far too risky to be left to chance. And since she has the oranges in the trees, she should be long the commodity and sell a contract (or "short" the contract.).

Answer 43

Solution: The correct answer is C. Intrinsic Value of Call = Stock Price - Strike Price, therefore IV = 48 - 50 = -2, however intrinsic value cannot be negative.

Answer 44

Solution: The correct answer is B. Naked call writing (selling) is the most dangerous position in the described selection. If the market price of a stock moves against a put writer, it can fall to zero and that's the end of it. If it moves against a call writer, the sky is the limit as to how high the price could go.

Answer 45

Solution: The correct answer is C. N = 5 × 2 =10 I = ? 4.25 × 2 = 8.5% PV = <900> PMT = (1,000 × .06) = 60/2 = 30 FV = 1,000 Tip: Don't forget to convert the answer back to per year

Answer 46

Solution: The correct answer is A. The expectations hypothesis explains the shape of the yield curve based on inflation expectations. If inflation is expected to be lower in the future, then the yield curve is sloping downward. Inflation rise = rate rise = curve rise

Answer 47

Solution: The correct answer is B. Conversion ratio = $1,000/$20 = 50 Always use the bond’s par value, NOT market value, when calculating the conversion ratio. The conversion ratio is fixed so using the market value wouldn't make sense because it changes based on stock price

Answer 48

Solution: The correct answer is B. Put Intrinsic Value = Strike – Stock 20 – 25 Intrinsic Value cannot = less than zero. Intrinsic Value is only from the perspective of the buyer, not the seller Negative intrinsic value makes no sense because no one would exercise an option at a loss

Answer 49

The correct answer is "C." The intrinsic value of a bond is its calculated present value. N = 7 x 2, i = 12 / 2, PV = ?, PMT =55, FV = 1,000

Answer 50

Solution: A

Answer 51

The correct answer is "C." Using the CAPM one can calculate this answer. Standard deviation and last years return are merely distractors. ER = Rf + B (Rm - Rf) ER = .0356 + 1.2 (.1093 - .0356) ER = .0356 + .0884 ER = .1240 = 12.4%

Answer 52

Answer: D Standard deviation is a measure of volatility and variability. Standard deviation by itself is not a risk-adjusted performance indicator. For Sharpe and Treynor to be meaningful, one Sharpe ratio needs to be compared to another Sharpe ratio and one Treynor ratio must be compared to another Treynor ratio. The Alpha ratio is calculated below: p = 0.15 - [0.025 + 1.75(0.07 - 0.025)] 0.15 - 0.1038 0.0462 or 4.62%

Answer 53

The correct answer is "D." You may use the "rule of thumb", that is, multiply the percent increase (or decrease) by the years of duration and this will give you the percent change in price of the bond. It is best, however, to calculate this with the appropriate change of the price of a bond's formula. Change in Price = -5 [1  (1 + .12)] = -4.5

Answer 54

The correct answer is "A." Use the intrinsic value formula to determine the correct dollar amount of this stock currently. V =D1  (r - g) = (.64 x 1.17)  (.20 - .17)

Answer 55

The correct answer is D If the bond has a high coupon (above YTM), expect lower duration (~50-60% of maturity). If the bond has a low coupon (below YTM), expect higher duration (~70-80% of maturity).

Answer 56

Answer: C Rent $500,000 - Expenses <$300,000> = Net Income $200,000 + Interest Expense $20,000 + Depreciation Expense $25,000 Net Operating Income $245,000 Net Operating Income (NOI) is BEFORE interest & depreciation. Net Income is AFTER these expenses, so you must add them back. Mortgage principal payments are NEVER included in NOI calculations

Answer 57

Solution: The correct answer is C. Lisa's expenses would be $150,000 in maintenance, $300,000 in salaries, $100,00 in utilities, $200,000 in depreciation and $150,000 in mortgage payments where $100,000 is interest expense and $50,000 is principal. $1,400,000 -$150,000 (maintenance) - $300,000 (salaries) - $100,000 (utilities) = $850,000 in Net Income NOI/Capitalization Rate = $850,000/.08 =$10,625,000

Answer 58

Solution: The correct answer is D. REITs pay no income tax as long as 75% of the REITs income comes from real estate and it pays out 90 percent of its taxable income to shareholders. Choice A is incorrect. REITs are not a well diversified portfolio. REITs are considered a sector exposure and would not be a diversified portfolio.

Answer 59

Solution: The correct answer is D. To hedge a long position to preserve your liquidation value, the investor needs a strategy that take advantage of a bear market. Purchasing a put is a bearish strategy.

Answer 60

Solution: The correct answer is D. Investors sell on the front end and buy back at a later time which exposed the investor to increases in the price which can have unlimited loss depending on the time and purchase price of the stock. Choices, A, B and C are characteristics of short selling.

Answer 61

Solution: The correct answer is B. REITS do not allow the investor to participate in the management of properties at a lower investment amount than directly investing, investing in a REIT is considered a passive activity. Choices A, C and D are true statements.

Answer 62

Solution: The correct answer is D. Statements II and III describe the secondary market. For 1, think of the government issuing debt.

Answer 63

Solution: The correct answer is D. The random walk hypothesis supports the notion that random price movements are indicative of efficient markets. Choice A is incorrect. A true statement would read...implies that security analysis is unable to predict future market behavior. Choice B is incorrect. A true statement would read...suggests that random patterns appear over periods of time. Choice C is incorrect. A true statement would read... has not been disproved based on recent computer simulations.

Answer 64

Solution: The correct answer is D. A refunding provision allows the bond issuer to call the bonds from the holder and then issue new bonds at a lower coupon rate, thereby reducing the cost of its debt. Choice A is incorrect. A call feature allows the issuer to redeem the bond issue prior to its scheduled maturity Choice B is incorrect. In a sinking fund, the issuer is required to retire portions of the bond issue prior to maturity. Choice C is incorrect. A subordinate clause states that if additional bonds are issues, the original bondholders will receive payment before the issuer pay debt issued afterwards.

Answer 65

Solution: The correct answer is D. UITs are typically unmanaged or passively managed. Choices A, B, and C are characteristics of UITs.

Answer 66

Solution: The correct answer is C. Closed end funds trade on exchanges with the help of a broker so are not repurchased by the investment company. Choices A, B, and D describe characteristics of a closed end investment company. Shares may trade at a premium or discount to NAV.

Answer 67

Solution: The correct answer is C. Bottom up analysts are looking for the next big, but as yet, undiscovered stock that will break onto the scene. Bottom up analysts start with the company, then the industry and finally the economic climate. Top-down starts with the economic climate, moves to the industry and then the company.