Investment Quiz 1

Question 1

Sam, a securities analyst for a large wire house, analyzes the history of security trades and stock prices looking for patterns and trends. He has been with the company for five years and has consistently been able to beat the S&P 500 Index by one to two percentage points on a yearly basis. Which of the following techniques would he use to identify stocks for his portfolio?

1. Calculate the intrinsic value of a stock using one of the stock valuation models.
2. Review a stock price’s moving average over a given time frame.
3. Review the trend, upward or downward, of the Dow Jones Industrial Average.
4. Calculate, review, and compare financial ratios among stocks in a selected sector.

Answer 1

2 and 3

Question 2

Vince, age 53, recently lost his $95,000 salaried job due to his company downsizing the management team. He communicates to his CFP® professional that he is working with an executive placement agency to prepare a resume and search for another position within his field of expertise. In the meantime, he is concerned that he will not have enough liquidity to pay for his current expenses. Which of the following should the CFP® professional recommend to Vince to provide for his current needs?
A)
Elect a Section 72(t) distribution from his traditional IRA worth $73,500.
B)
Take a loan from his Section 401(k) plan, with a balance of $350,000, and place this money into an interest-bearing money market deposit account.
C)
Sell a portion of his ABC stock that he purchased five years ago for $25,000, which is currently worth $50,000.
D)
Sell his collection of inherited artwork worth $40,000 at auction.

Answer 2

C

Question 3

Samuel’s bond has a current market value of $1,056.78 and Macaulay duration of 7.9. If the bond’s yield-to-maturity (YTM) changes from 5.5% to 4.0%, what is the expected percent change in the market price of the bond?

A)
-14.20%
 B)
1.50%
 C)
5.11%
 D)
11.23%

Answer 3

D

Question 4

Kevin and Angela are both in their mid 40s. He works as a manager at a home improvement store. She is an elementary school teacher. They have two school age children. Both children have college savings plans funded solely by their paternal grandparents. The couple needs to assess the asset allocation of their current investments. After meeting with the couple, their CFP® professional determines they are moderate to aggressive risk takers with a long-term time horizon. Furthermore, they are willing to accept additional risk to achieve higher rates of return. Based on the information provided, their CFP® professional should recommend which of the following allocations?
A)
Portfolio 1 - 15% S&P 500 Index Fund, 45% Small-Cap Stock Fund, 10% High-Yield Bond Fund, 30% Municipal Bond Fund.
B)
Portfolio 3 - 15% Pacific Rim Growth Fund, 30% Small-Cap Venture Growth Fund, 30% Biotechnology Fund, 25% High-Yield Bond Fund.
C)
Portfolio 4 - 65% S&P 500 Index Fund, 15% Foreign Stock Fund, 10% High-Yield Bond Fund, 10% U.S. Government Securities Fund.
D)
Portfolio 2 - 20% Large-Cap Stock Fund, 30% Corporate Bond Fund, 40% Russell 2000 Index Fund, 10% Emerging Markets Fund.

Answer 4

C

Question 5

The City of Greensboro issued AA rated bonds with a 15-year maturity, $1,000 par value, and 3.75% coupon (paid semiannually) to fund a new water and sewer infrastructure. Three years after issue, interest rates on similar bonds fell to 3.25%. At what price should these bonds sell for in the marketplace? (Round to the nearest dollar)
A)
$1,049
 B)
$1,000
 C)
$1,128
 D)
$739

Answer 5

A

Question 6

Given the following information:

Portfolio A 
Standard deviation = 12% 
Beta = 2.05 
Actual return = 4.5% 
Expected return = 7%

Portfolio B 
Standard deviation = 8.5% 
Beta = 1.45 
Actual return = 8% 
Expected return = 7.5%

Assume a risk-free rate of return of 1.75% and an R2 of 0.70 with respect to the market. Which of the following statements is CORRECT?

A)
Portfolio B has a higher Sharpe ratio than Portfolio A indicating that Portfolio B outperformed Portfolio A on a risk-adjusted basis.
B)
Portfolio B has a higher Treynor ratio than Portfolio A indicating that Portfolio B outperformed Portfolio A on a risk-adjusted basis.
C)
Portfolio A has a higher Sharpe ratio than Portfolio B indicating that Portfolio A outperformed Portfolio B on a risk-adjusted basis.
D)
Portfolio B has a higher Jensen’s alpha than Portfolio A indicating that Portfolio B outperformed Portfolio A.

Answer 6

A

Due to the fact that R2 is less than 0.75, the Sharpe ratio must be used to compare the risk-adjusted performance of the portfolios.

Question 7

Amanda buys 75 shares of BR Enterprise stock for $67 per share on margin. The initial margin is 55%, and the maintenance margin is 40%. If she sells the stock for $78 per share, what is her holding period rate of return (rounded to the nearest percent)?

A)
30%.
 B)
16%.
 C)
36%.
 D)
23%.

Answer 7

A

Proceeds	$78				
Cost	       ($67)				
Gain	        $11 x 75 shares = $825
(basis)		75 × $67 × 55% = $2,763.75
Therefore, $825 ÷ $2,763.75 = 29.85% (rounded to 30%)

Question 8

Lucy and Rick, ages 52 and 47 respectively, are concerned that they will not have enough money to retire comfortably at Lucy’s age 70. Lucy was recently promoted to district manager of an inventory control company. Along with the promotion, they have an additional $400 per month they would like invest into a new retirement investment portfolio. They consider themselves to be aggressive risk takers with a long-term time horizon. Which of the following portfolios should their CFP® professional recommend for investment?
A)
Portfolio 3 - 60% Russell 2000 Index Fund, 30% U.S. Government Securities Fund, 10% Money Market Fund.
B)
Portfolio 4 - 20% S&P 500 Index Fund, 40% Corporate Bond Fund, 40% Municipal Bond Fund.
C)
Portfolio 1 - 20% Balanced Fund, 60% High-Yield Bond Fund, 10% Emerging Markets Fund, 10% International Stock Fund.
D)
Portfolio 2 - 70% S&P 500 Index Fund, 20% Corporate Bond Fund, 10% International Stock Fund.

Answer 8

D

Question 9

Simon and Alexandra Baker are interested in U.S. savings bonds. The couple is expecting their first child in three months. Their financial goals are to save for retirement and the education of their child. The Bakers should purchase:
A)
Series EE bonds in their child’s name to receive tax-free earnings for the child’s future education.
B)
Series I bonds for inflation-protected savings for their child’s education.
C)
Series EE or I bonds for tax-free earnings when used for Simon’s graduate school tuition.
D)
Series HH bonds for tax-efficient savings for their child’s education.

Answer 9

B

Series HH bonds cannot be purchased and are no longer available for exchange of Series EE bonds. To receive the tax benefits for qualified higher education, Series EE or I bonds must be purchased by a taxpayer who is at least 24 years old and who uses the proceeds to finance qualified education expenses for himself, his spouse, or a dependent. Series I bonds provide inflation protection because they have a fixed base rate and an inflation adjustment.

Question 10

Of the four pairs of assets below, which pair provides the highest level of diversification?
A)
Assets 1 & 2: with a correlation coefficient of +0.92.
B)
Assets 5 & 6: with a correlation coefficient of 0.
C)
Assets 3 & 4: with a correlation coefficient of +0.37.
D)
Assets 7 & 8: with a correlation coefficient of −0.78.

Answer 10

D

Question 11

An investor is considering the following four bonds:

Coupon	Current Yield	Maturity	Duration
Bond A	6%	8%	10 years	7.62 years
Bond B	10%	10%	12 years	7.54 years
Bond C	0%	8%	8 years	8 years
Bond D	8%	10%	8 years	6.72 years
Which of the following statements are CORRECT?

1. Bond A is more volatile than Bond B.
2. Bond C is more volatile than Bond B.
3. Bond D is less volatile than Bond A.
4. Bond D is more volatile than Bond C.

Answer 11

1, 2, and 3

Only statement 4 is incorrect. Bond D is less volatile than Bond C. Duration captures the impact of a bond’s coupon, maturity, and current yield to provide a measure for the interest rate risk of a bond. The longer the duration, the greater the price change due to a change in interest rates. Bond C is the most price sensitive because it has the longest duration.

Question 12

What is the duration of a bond purchased for $948.50 that matures in 5 years and has a coupon rate of 12.5%? (Assume annual coupon payments.)
A)
3.919 years.
 B)
3.977 years.
 C)
3.948 years.
 D)
4.006 years.

Answer 12

B

Question 13

Steve, age 34, has $50,000 to invest in a fixed-income security. He has invested in bonds in the past and considers himself to be an aggressive investor. Steve is in the 28% tax bracket and is primarily interested in capital appreciation. Income is a secondary consideration. Steve is reviewing the following securities:

1. 12-year, B rated, non-callable corporate bond trading at par with a yield of 6%.
2. 25-year, AA rated, callable general obligation municipal bond selling at a discount and yielding 5%.
3. 10-year, Baa rated, callable corporate bond selling at a premium with a yield of 5.5%.
4. Treasury bills with a yield of 4%.

Which one of these fixed-income securities would be the most appropriate choice for Steve?

Answer 13

2

A tax-exempt municipal bond usually has a higher after-tax yield. The 25-year bond is more likely to generate capital gains if market interest rates fall further. Assuming Steve is an aggressive investor, there is no reason he should invest in Treasuries.

Question 14

Jim Tripp is an investor in the 33% tax bracket. If Jim invests in a 4.75% municipal bond, his taxable equivalent yield (TEY) would be:
A)
6.27%
 B)
7.09%.
 C)
4.75%.
 D)
3.23%.

Answer 14

B

Question 15

Security A has a standard deviation of 23% and the market has a standard deviation of 18%. The correlation coefficient between Security A and the market is 0.80. What percent of the change in Security A's price can be explained by changes in the market?
A)
50%.
 B)
36%.
 C)
64%.
 D)
80%.

Answer 15

C

square the correlation!

Question 16

Carla is meeting with her CFP® professional, John, to evaluate the financial strengths and weaknesses of her current situation. Her CPA has prepared a statement of financial position for Carla’s reference, which she presents to John for analysis. After the meeting, John discovers that the balance of her traditional IRA on her brokerage statement is $150,000, but on her statement of financial position, the balance is listed as $115,000. What should John do next?
A)
John should amend the statement of financial position to reflect the $150,000 balance.
B)
Contact Carla’s CPA to discuss the statement of financial position.
C)
Contact Carla to verify the accuracy of the information on the statement of financial position.
D)
Proceed with developing the financial plan based on the information provided by the client.

Answer 16

C

Question 17

ABC’s stock is currently trading in the secondary market for $80 per share. John purchases an ‘in-the-money’ call option contract, selling at $11, with an expiry date in two months and an exercise price of $75. If the stock price increases to $88 per share and he exercises the option, which of the following is CORRECT?

1. He realized a net profit of $200.
2. He paid $1,100 for the call option contract.
3. He realized a net loss of $800.
4. He paid $7,500 to buy the stock upon exercise.

Answer 17

1, 2, and 4

Question 18

Harvey, a 70-year old retiree, recently purchased a condominium in Florida to be closer to his grandchildren. He receives a pension of $1,500 per month, and his current investments are estimated to provide an additional $250 per month for the remainder of his life. Recently, Harvey was in a car accident and received $250,000 in compensation for his injuries. He would like to invest the funds in a guaranteed investment that will increase his total monthly income to $2,750. Based on this information, which of the following securities should Harvey purchase?

A)
30-year U.S. Treasury bonds with a 5.15% coupon.
B)
10-year TIPS with a 4% coupon.
C)
30-year STRIPS based on 5% coupon Treasury bonds.
D)
Series EE savings bonds with a current yield of 1.5%.

Answer 18

A

Harvey requires an additional $1,000 per month or $12,000 per year on newly invested dollars. This translates into a minimum rate of return of 4.8% ($12,000 ÷ $250,000). TIPS, STRIPS, savings bonds, and Treasury bonds are all guaranteed by the U.S. government, but only the Treasury bonds provide the necessary income to reach his goal. STRIPS and U.S. savings bonds will not provide him with any current income.

Question 19

William, a CFP® professional, has prepared a comprehensive financial plan for his clients, Harvey and Elayne. The couple is scheduled to come to his office next week to review the documents. During the next meeting, William should cover all of the following points EXCEPT?
A)
He should review the couple’s goals and objectives.
B)
He should define the scope of the engagement with the clients.
C)
He should provide the couple with his recommendations.
D)
He should present a number of alternatives to his clients.

Answer 19

B

Question 20

When the market yield is 8%, which of the following equally rated bonds will have the potential for the greatest relative price volatility to changes in interest rates?
A)
A 12% coupon bond with 12 years to maturity.
B)
An 8% coupon bond with 12 years to maturity.
C)
A 12% coupon bond with six years to maturity.
D)
An 8% coupon bond with six years to maturity.

Answer 20

B

Generally, a low coupon bond is more susceptible to price fluctuations than a high coupon bond and a long-term bond is more susceptible to price fluctuations than a short-term bond. The bond with the lowest coupon and highest maturity is subject to the greatest price volatility.

Question 21

Adam, age 42, considers himself to be an aggressive risk investor. He has a large investment portfolio that he actively manages through fundamental analysis. He is always searching for new and exciting investment ideas to increase the value of his portfolio. Generally, he would prefer which of the following stocks for his investment portfolio?

1. ABC stock with lower risk and high positive skewness.
2. JEM stock with higher risk and low positive skewness.
3. XYZ stock with lower standard deviation and a leptokurtic distribution.
4. CPM stock with higher standard deviation and a platykurtic distribution.

Answer 21

1 and 3

Investors generally seek an investment with low risk (low standard deviation). Also, they would tend to prefer stocks with high positive skewness and a leptokurtic distribution. Stocks exhibiting high positive skewness have a larger than average number of positive price movements. Investments exhibiting a leptokurtic distribution have more observations clustered around the mean, resulting in lower variance (standard deviation).

Question 22

Suppose Mij Saito, a Japanese investor invested 1,000,000 yen in ABC stock in the U.S. when the exchange rate was 125 yen = $1 and ABC was at $50 per share. After six months ABC was selling at $54 per share and Mij liquidates his investment. However, the Yen depreciated by 10% during this period. Which of the following statements is NOT correct?

A)
Mij earned a 20% return on his investment when he converted his sale proceeds into yen.
B)
Mij held 160 shares of ABC.
C)
The dollar was selling for 112.5 yen when Mij sold his shares.
D)
ABC yielded an 8% return to U.S. investors.

Answer 22

C

Question 23

XYZ mutual fund is researching the possibility of acquiring shares of a manufacturing company in a foreign country. Which of the following risks should the investment company analyze and review before making the investment?

1. Political risk.
2. Exchange rate risk.
3. Marketability risk.
4. Default risk.

Answer 23

1, 2, and 3

XYZ mutual fund should be concerned with all of these risks except default risk. The investment company is acquiring shares of the company rather than debt, therefore, the investment is not subject to default risk.

Question 24

Tom owns a taxable investment that earns 8% interest annually. Tom pays taxes at a marginal rate of 28%. What is the after-tax rate of return that Tom will receive on this investment?
A)
2.24%
 B)
5.76%
 C)
6.25%
 D)
6.30%

Answer 24

B

Question 25

William purchases a 20-year AA rated corporate subordinated debenture for $1,025. This bond features a 5.75% coupon rate and may be called in 10 years for 105% of par. What is the bond’s yield to call (YTC)?

A)
5.68%
 B)
5.79%
 C)
5.55%
 D)
5.25%

Answer 25

B

Question 26

Mark’s company, which is located in Oregon, makes unfinished wood furniture. His company sells this furniture directly to the public from a large warehouse. Theresa’s company, which is located in southern Georgia, grows cotton for t-shirts manufacturers. Which of the following statements correctly identifies hedging strategies for Mark and Theresa?

1. Mark should buy lumber futures.
2. Theresa should sell cotton futures.
3. Mark should sell lumber futures
4. Theresa should buy cotton futures.

Answer 26

1 and 2

Mark is short lumber because he needs lumber to produce his products. A hedge position for Mark would be to go long lumber futures, that is, to purchase lumber futures. Theresa is long cotton because she owns cotton for manufacturing purposes. A hedge position for Theresa is to go short, that is, to sell cotton futures.

Question 27

if you are in need of a certain material to produce the good/service you provide then you are said to be ___ in that material and should hedge your risk by ____ futures in that material

Answer 27

short ; buy

Question 28

Sam, a CFP® professional, is conducting his initial interview with Harvey, a prospective client. Harvey has told Sam that he will be receiving a large inheritance and would like to set up an account for the benefit of his three adult children. What step should Sam take next in the meeting?
A)
Provide Harvey with his firm’s advisory agreement.
B)
Discuss his methods of compensation.
C)
Ask Harvey open-ended questions to ascertain more information.
D)
Offer client testimonials.

Answer 28

C

Question 29

Lauren owns a AA rated corporate bond with a current market value of $987.34. The bond's YTM changes from 5.45% to 4.98%. What is the estimated percent change in the price of the bond assuming a Macaulay duration of 4.6 years?
A)
−0.47%.
 B)
\+0.05%.
 C)
−2.16%.
 D)
\+2.05%.

Answer 29

D

Question 30

Owen holds XYZ stock. The stock recently increased in value by 50%. He would like to preserve as much of this gain as possible and retain the potential for additional price increases. Which strategy best meets Owen's goal?
A)
Buy a call option.
 B)
Buy a put option.
 C)
Short the stock.
 D)
Write a call option.

Answer 30

B

Question 31

Franklin is considering investing in bonds. He may purchase a corporate bond paying a 7% coupon or a municipal bond paying a 5.3% coupon. If his marginal federal income tax rate is 33% and his state does not collect income taxes, Franklin would prefer:
A)
the municipal, because its taxable equivalent yield is 7.91%.
B)
the corporate, because its after-tax yield is 10.45%.
C)
the municipal, because its taxable equivalent yield is 16.06%.
D)
the corporate, because its after-tax yield is 21.21%.

Answer 31

A

Question 32

An analyst estimates the probabilities that a stock has the following returns:

Return	Probability
12%	0.15
11%	0.55
8%	0.30
What is the expected rate of return of the portfolio?

Answer 32

10.25%

Question 33

Adam has a portfolio of bonds worth approximately $125,000. He is concerned that interest rates will increase in the near term. Which of the following would be the least desirable strategy for Adam?
A)
Sell Treasury bonds and buy Treasury bills.
B)
Sell long-term bonds and buy short-term bonds.
C)
Sell low-coupon bonds and buy bonds with high coupons.
D)
Sell low-duration bonds and buy longer duration bonds.

Answer 33

D

low duration = less price volatile

Question 34

Nicholas owns 100 shares of XYZ stock. The stock has an expected rate of return of 8.75%. The risk-free rate of return is 3% and expected market rate of return is 9.5%. What is the beta of Nicholas’s stock? Is his stock less or more risky than the market?

A)
With a beta of 0.76, the stock is less risky than the market.
B)
With a beta of 0.88, the stock is less risky than the market.
C)
With a beta of 1.34, the stock is more risky than the market.
D)
With a beta of 1.13, the stock is more risky than the market.

Answer 34

B

Question 35

David and Edith have scheduled a meeting with Rebecca, a CFP® professional, to discuss their current retirement planning strategy. Rebecca has established the relationship and completed gathering all of the couple’s pertinent information. She is currently analyzing and evaluating the couple’s information. David and Edith have been diligent savers and have very little debt, except for a car loan and home mortgage. They have been uneasy about saving for their retirement. Rebecca notices that the couple is nervous, yet she is confident they have made smart choices with their money. What should she do next?

1. Reassure them that they are on the right track.
2. Review their current asset allocation strategy for retirement planning.
3. Discuss the timeline for implementation of recommendations.
4. Have the clients sign the appropriate brokerage account forms to open a new account.

Answer 35

1 and 2

During the analyzing and evaluating the client’s current financial status phase, the planner should review the couple’s present asset allocation strategy and reassure them of their current progress. Discussing the timeline for implementation and having the couple sign brokerage forms occur during the implementation phase.

Question 36

Eugene, who is in the 33% marginal income tax bracket, would like to purchase a bond for his investment portfolio. Which of the following bonds would offer him the highest after-tax yield?

A)
3.35% municipal bond
 B)
4.25% U.S. Treasury bond
 C)
4.00% qualified private activity bond
 D)
6.85% corporate bond

Answer 36

D

The after-tax yield computation may be used to compare the advisability of investing in taxable issues with that of investing in municipal tax-exempt issues. Eugene should purchase the corporate bond based on the following after-tax yield calculations:

U.S. Treasury bond [4.25% × (1 − 0.33)] 2.85%
Corporate bond [6.85% × (1 − 0.33)] 4.59%
Municipal bond (tax-free) 3.35%
Qualified private activity bond (tax-free) 4.00%

Question 37

Shelly has been picking stocks for her personal investment portfolio for a number of years. Most recently, she has picked a number of big winners and only a few losers. Her confidence has significantly increased as of late, and she has decided to increase her risk tolerance to take advantage of her ability to pick winners. As a financial advisor, what advice would you give Shelley?

1. In order to make prudent investment choices with your money, you should recall and analyze both your successes and failures.
2. Based on your continued success, you should make additional risky investments.
3. You should remain highly optimistic as to the growth prospects of your investment portfolio.
4. Even though you are currently picking winners, you should understand that this type of success is difficult to maintain over the long term.

Answer 37

1 and 4

Question 38

Thomas, a wealthy investor, emails his CFP® professional, Vance, regarding a referral to a trust company. Vance diligently provides him with the name of a woman at a local trust company with whom he has referred many clients over the years. Thomas appreciates the referral and tells Vance he will call her. Vance immediately calls his friend to discuss Thomas’s personal and financial information. What is the consequence of Vance’s action?
A)
Thomas will be guaranteed excellent service based on the referral.
B)
By providing the information to the trust company, Vance has performed diligently.
C)
By revealing the client’s personal and financial information, Vance violated the Principle of Confidentiality.
D)
Vance showed a high level of professionalism by immediately contacting his friend at the trust company to discuss the case.

Answer 38

C

Question 39

Roger, age 29, is an administrator at the local hospital. His current salary is $30,000 and he expects his MAGI this year to range from $35,000 to $45,000. He is currently designing an education investment program to help fund the college education for his 10-year-old son, Tom. Roger wants a portion of the investment portfolio to be invested in tax-exempt securities. Which of the following investments would produce tax-free interest or dividends?

1. Zero-coupon Treasury bonds.
2. State of Louisiana bonds with a 5% coupon rate.
3. Zero-coupon corporate bond with a duration of 7.3 years.
4. Series EE savings bonds.

Answer 39

2 and 4

Although the Treasury and corporate bonds are zero-coupon bonds, the taxpayer will still be responsible for paying federal income tax on the accrued interest each year. Interest on municipal bonds is not taxed at the federal level. Series EE bonds are not taxed if the proceeds are used for qualified education purposes. The tax benefit of Series EE bonds is phased out at certain MAGI levels (for 2016, the phaseout for single is $77,550 to $92,550 and $116,300 to $146,300 for married filing jointly); however, Roger is well below those levels.