Investment Quiz 2 Flashcards
David is analyzing two potential stocks for investment.
E(r) σ
ABC stock 12.5% 4.5%
XYZ stock 18.3% 5.2%
Assume that the two stocks have a covariance of −6.3. Based on the information provided, which of the following statements is(are) CORRECT?
- The coefficient of variation (CV) for ABC stock is 0.36.
- The correlation coefficient between the two stocks is −0.2692.
- Based on a comparison of CVs, XYZ stock is less risky.
- The two stocks are negatively correlated.
all are correct
All of these statements are correct. With a correlation coefficient of -0.2692, the two stocks are negatively correlated. With a higher CV, ABC stock is riskier than XYZ stock.
Calculations:
ABC CV = 4.5% ÷ 12.5% = 0.36
Correlation coefficient = -6.3 ÷ (4.5% × 5.2%) = -0.2692
XYZ CV = 5.2% ÷ 18.3% = 0.2842
Owen purchased 100 shares of ABC stock for $32 per share from his stockbroker and CFP® professional, Lucas. One year later, the stock paid a dividend of $1.50, and he purchased an additional 100 shares for $35 per share. At the end of the second year, he contacted Lucas to sell all of the stock for $31 per share using a limit order. The order was filled and the stock sold at $31 per share. The stock did not pay a dividend at the end of the second year. What was the dollar-weighted return to Owen over the two-year holding period?
A) 1.05% B) -6.61% C) -5.14% D) -3.63%
D
Lucy and Bobby are concerned about their estate plan. They have contacted a CFP® professional, Mike, to help them with their concerns. During the meeting, Mike discovered that the couple’s estate planning documents did not truly reflect their wishes for asset management and transfer. The couple did indicate that they have the name of a top estate planning attorney to assist them with document preparation. As a result, Mike should take which of the following actions?
A)
Recommend they transfer any investment brokerage accounts to his firm.
B)
Insist the couple speak with his personal estate planning attorney.
C)
Have the couple set up a meeting with their estate planning attorney to discuss their goals.
D)
Offer to help the client set up a trust to mange their investments.
C
When conducting a Monte Carlo simulation, Charlie, a CFP® professional, intentionally inflates the projected rates of return used in the analysis. As a result, he is overestimating the future value of his client’s accounts. However, he feels he must show the client excellent performance in order to sell his investment products. Has his actions violated any of the Principles found in CFP Board’s Code of Ethics?
A)
Yes, he has violated the Principle of Confidentiality.
B)
No, he has complied with the Principle of Competence.
C)
Yes, he has violated the Principle of Integrity.
D)
No, he has complied with the Principle of Fairness.
C
You compile the following information regarding stocks A and B:
Expected return on stock A = 12%
Expected return on stock B = 24%
Standard deviation of stock A returns = 4%
Standard deviation of stock B returns = 10%
Covariance of stocks A and B returns = 0.0024
What is the expected return of a portfolio that has $30,000 invested in stock A and $70,000 in stock B?
A) 18.0%. B) 22.3%. C) 20.4%. D) 8.2%.
C
DEF Company stock has an average long-term return of 11% and a standard deviation of 4%. What is the probability that the stock will earn a return over 15% (round to the nearest whole number and assume a normal distribution)? A) 33%. B) 19%. C) 16%. D) 13%.
C
Don purchases 100 shares of XYZ stock at $80 per share on margin. The initial margin requirement is 40% and the maintenance margin is 35%. At what stock price will a margin call be triggered?
A) $55.00. B) $66.67. C) $73.85. D) $137.14.
C
Don’s original investment is 40% of $8,000, or $3,200, so he is borrowing $4,800 (debit balance) from the broker-dealer. The formula for forecasting a margin call is as follows:
Debit Balance = $4,800
Margin Call = Debit Balance ÷ (1 − Maintenance Margin) = $4,800 ÷ (1 − 0.35)
Account value triggering a margin call = $7,385
Share price triggering a margin call ($7,385 ÷ 100 shares) = $73.85
A call option to purchase 100 shares of WARCO common stock at an exercise price of $40 is currently priced at $15. WARCO’s common stock is currently selling for $50. Which of the following statements are CORRECT?
- The time value of the call option is $5.
- The call option is out-of-the-money.
- A writer of the call option will receive a premium of $1,000 from the buyer.
- The intrinsic value of the call option is $10.
1 and 4
Ben, a manager of local restaurant, is meeting with a CFP® professional, Alana to discuss his investment planning. He is expecting a significant pay increase and would like to increase his savings rate. He currently has a Section 401(k) plan with his employer that he contributes 5% of his gross salary. The company provides him with a variety of investment choices and a dollar-for-dollar match up to 2%. At this point in the meeting, Alana is ready to gather information necessary to fulfill the engagement. Which of the following should be accomplished during this phase of the meeting?
- She should ask Ben what money means to him and why.
- She should ask about his goals, dreams, and aspirations.
- She should seek to understand any obstacles that may prevent him from reaching his goals.
- She should conduct a thorough risk tolerance analysis.
all are correct
Joe wants to buy a business in 10 years for $150,000. He currently has a zero-coupon bond with a market value of $1,157.98 that he will use toward this purpose. The zero-coupon bond has a face value of $2,500 and will mature in 10 years. The bond has a semiannual effective interest rate of 3.923%. In addition to the bond, he wants to save a monthly amount to reach his goal. How much is Joe's required beginning of the month payment to accumulate the $150,000, including the zero-coupon bond, at an assumed interest rate of 11%? A) $673.56. B) $676.10. C) $679.73. D) $669.96.
A
Annabelle, age 62, enjoys investing in real estate. Along with her numerous residential and commercial real estate properties, she has a number of investment accounts. Her CFP® professional, Roy, has worked with her for the past 15 years in preparing and monitoring her financial plan. Recently, Annabelle communicated to Roy that she would like to purchase a specific property located downtown for commercial development. Shortly after their conversation, Roy discovered that the property was listed for sale in the local business journal and he confirmed this information with a real estate broker. What should Roy do next?
A)
Contact the listing agent and provide this person with Annabelle’s contact information.
B)
Purchase the property for his personal portfolio and resell it to Annabelle for a profit.
C)
Wait for Annabelle to contact him to discuss financing alternatives.
D)
Contact Annabelle and provide the information for her to contact the listing agent on the property.
D
If Mr.Van Reham made a $1,000 investment four years ago that presently has a value of $3,150, the geometric mean return over the four-year investment period is:
A) 57.50%. B) 78.75%. C) 53.75%. D) 33.22%.
D
Sally, Michael, and Anita use different methods for choosing assets for their investment portfolios. Sally uses technical analysis to determine when to buy and sell the stocks in her portfolio. Michael is committed to a passive investment strategy and a well-diversified portfolio of randomly selected stocks. Anita ignores historical volume and price information but reviews the financial statements of the firms in which she is interested. Which of the following statements best describe Sally, Michael, and Anita?
- Anita accepts the strong form of the efficient market hypothesis (EMH).
- Michael accepts the semi-strong form of the EMH.
- Sally accepts the weak form of the EMH.
2 only
Under the weak form of the EMH, access to fundamental analysis and insider information can achieve superior results. Under the semistrong form of the EMH, only access to insider information can achieve superior results. Under the strong form of the EMH, not even access to insider information can achieve superior results. Anita uses fundamental analysis, which is supported only by the weak form of EMH. Michael does not use fundamental or technical analysis. His strategy is supported by the semistrong and strong forms of the EMH. Sally uses technical analysis, which is rejected by all forms of the EMH.
Which of the following statements would provide evidence against the semi-strong form of the efficient market hypothesis?
A)
Fundamental analysis is not useful in predicting future stock prices.
B)
Markets react quickly to the Federal Reserve Bank Chairman’s address to the Congress.
C)
On average, about 50% of mutual funds outperform the market in any given year.
D)
Small capitalization firms tend to achieve higher returns than large capitalization firms.
D
Small-cap stocks tend to outperform large-cap stocks over the long-term indicating that the market has not adjusted to this anomaly and has low expected returns (or underestimates the growth rate) of small-cap stocks. If the market reacts to all public information (and market capitalizations are public information), then this observation tends to discredit the semistrong form of the EMH. If 50% of mutual funds outperform the market, this would not discredit the semi-strong EMH because 50% of mutual funds underperform the market. The market’s quick reaction to the Fed Chairman’s address is consistent with semi-strong form efficiency, as markets quickly react to new information. According to semi-strong efficiency, all public information is already discounted in prices. The inability of fundamental analysis to identify mispriced securities is consistent with the semi-strong form of the EMH.
Nicholas owns ABC stock which is trading for $35 per share. However, he believes the stock may come under pressure from a negative earnings report. He would like to earn a profit from any potential decline while simultaneously protecting his long position. Which of the following would be the best choice for Nicholas? A) sell a put option. B) sell the stock short. C) purchase a put option. D) purchase a call option.
C
