Investments

Question 1

_____ are unsecured corporate debt.

Answer 1

Debentures.

Question 2

Lack of a definite ____ and uncertain ____ ____ are two of the main risks involving mortgage-backed securities (MBS).

Answer 2

1. Actual maturity is not known with certainty.
2. Actual cash flows are not known with certainty.
   - you don’t know if someone will pay their mortgage off early.

Question 3

The ____ the coupon, the more volatile the bond.

The ____ the maturity, the more volatile the bond.

Answer 3

1. lower.

2. longer.

Question 4

1. ___ bonds are high risk bonds.
2. ____ are unsecured debt.
3. ___ ____ bonds are lower quality than investment grade and cost the issuer more in interest payments.
4. _____ _____ _____ serve as collateral for certain types of equipment.

Answer 4

1. Income bonds.
2. Debentures.
3. High yield bonds.
4. Equipment Trust Certificates.

Question 5

Workers compensation is a(n) _____ form of liability.

Answer 5

Absolute.

-Regardless of fault if injured at work the employee will collect benefits.

Question 6

The ____ form of the EMH states that “the current price of a security reflects all historical information available on that security and does not reject fundamental analysis.”

Answer 6

Weak form of EMH.

Question 7

The ____ form of EMH presumes markets are completely efficient and historical, public and private information will not help you achieve above average market returns, and that all information, including insider information is reflected in prices.

Answer 7

Strong form of EMH.

Question 8

This form of EMH theory rejects fundamental analysis and technical analysis.

Answer 8

Semi-strong form.

Question 9

One implication of ___ is that consistent superior performance is rare. One cannot consistently earn abnormal returns. Overtime, these superior returns will be reversed and overall gain is consistent with the general market.

Answer 9

EMH.

Question 10

To immunize a bond portfolio over a specific investment horizon, you need to match the average weighted ____ of the bond portfolio to the investment horizon.

Answer 10

Average Weighted Duration.

Question 11

The ____ of a bond is a function of its:

1. Current price.
2. Time to maturity.
3. Yield to maturity.
4. Coupon rate.

Answer 11

Duration.

PTYC
Price
Time
Yield
Coupon

Question 12

A bond’s _____ is the weighted average maturity of call cash flows.

Answer 12

Duration.

Question 13

____ is the moment in time the investor is immunized from interest rate risk and reinvestment rate risk.

Answer 13

Duration.

Question 14

The bigger the ____ of a bond, the more price sensitive or volatile the bond is to interest rate changes.

Answer 14

Duration.

Question 15

Modified _____ is a bond’s price sensitivity to changes in interest rates.

Answer 15

Modified Duration.

Question 16

A bond portfolio should have a _____ equal to the investor’s time horizon to be effectively immunized.

Answer 16

Duration.

(NOT maturity.).

Question 17

_____ is the time remaining when a security’s discounted future cash flow remains at risk.
This is an accurate measure of a bond’s sensitivity to interest rate risk.

Answer 17

Duration.

Question 18

______ acceptance are paper traded between banks such as letters of credit to facilitate international trade.

Answer 18

Banker’s Acceptance.

Question 19

_______ agreements are money market securities sold at a discount with an agreement to purchase them back at a higher price later on.

Answer 19

Repurchase Agreements.

Question 20

_______ contracts are agreements to transact in the future.

Answer 20

Forward Contracts.

Question 21

The interest on ____ bonds would be tax-exempt if it were used to finance education costs.

Answer 21

EE Bonds.

Question 22

A _______ swap is designed to take advantage of anticipated and potential yield differentials between bonds that are similar with regard to coupons, rating, maturities, and industry.

Answer 22

Substitution Swap.

Question 23

_____ anticipation swaps utilize forecasts of general interest rate changes.

Answer 23

Rate Anticipation Swaps.

Question 24

The ____ pickup swap is designed to alter the cash flow of the portfolio by exchanging similar bonds having different coupon rates.

Answer 24

Yield Pickup Swap.

Question 25

The ___ swap replaces bonds with offsetting capital gains and losses.

Answer 25

Tax Swap.

Question 26

In computing portfolio performance, the Sharpe index uses ______________, while the Treynor index uses ________________ for the risk measure.

Answer 26

Standard Deviation.

Beta.

Question 27

The ___ Performance Index is a risk-adjusted return measure that uses Beta.
Reward-to-volatility ratio.
Comparison only.
Higher is better.
Use if R^2 > 0.70= Diversified portfolio.

Answer 27

The Treynor Performance Index.

Question 28

The _____ Performance Index is a risk-adjusted return measure that uses Standard Deviation.
Reward-to-variability ratio, comparison only, higher is better.
Use if: single security, R^2<0.70, undiversified.

Answer 28

The Sharpe Performance Index.

Question 29

The ____ Performance Index is a risk-adjusted return measure where:
+alpha = good.
- alpha= bad.

-Does not need comparison.

Answer 29

The Jensen Performance Index.

Question 30

_____ is the difference between a fund’s realized return and its risk-adjusted expected return, as measured by CAPM.

Answer 30

Alpha.

Question 31

The _____ _____ _____ bond is a bond issued by an entity that has some ability to levy taxes to support itself (for example, a school district). However, this ability is limited when compared to that of the general taxing power of the state.

Answer 31

Limited General Obligation Bond.

Question 32

The market where exchange and broker dealer services are eliminated entirely is the _____ market.
This is the market where corporation and institutional investors deal directly with one another.

Answer 32

The Fourth Market.

Question 33

How many days prior to the date of record must an investor purchase a stock to receive a dividend?

Answer 33

2 days.

The ex-dividend date is one day prior to the date of record. An investor must purchase the stock the day before the ex-dividend date to receive the dividend. Therefore, an investor would have to purchase the stock two days prior to the date of record to receive the dividend.

Question 34

If the risk/return performance of a stock lies above the Security Market Line, the stock is said to have a positive _____.

Answer 34

Alpha.

Question 35

The ____ determines the required rate of return given an asset’s systematic risk (beta).

Answer 35

CAPM.

Question 36

The ___ is a graphical depiction of the CAPM. The slope is the market risk premium (Rm-Rf).

Answer 36

SML.

Question 37

The slope of the SML becomes _____ if investors become more risk averse. (i.e. require higher rates of return to invest in the market, instead of investing in risk free assets.).
-SML shifts (no change in slope) when market interest rates change.

Answer 37

Steeper.

Question 38

The ___ uses standard deviation, while the ___ uses the beta as its “risk” measurement.

Answer 38

CML.

SML.

Question 39

Given that the maximum correlation possible is +1, the average deviation of returns of a portfolio can never be _____ than that of individual securities. They can be equal to or less than.
(Note: Portfolio deviation is NOT a weighted average.)

Answer 39

Greater.

Question 40

Which of the following requires registration under disclosure rules with the Securities and Exchange Commission?

A. Sale of an entire issue of securities in an IPO.
B. Sale of securities in a single block to a public pension fund.
C. Sale of an entire issue of securities to a single investor.
D. Sale of securities in a single block to a publicly-traded mutual fund.

Answer 40

Solution: The correct answer is A.

All answers except “A” constitute private placement.

Question 41

An investor who rebalances her portfolio frequently to take advantage of perceived opportunities in other market sectors like is expected price level changes (timing) arising from broad movements in the business cycle is using _____ asset allocation.

Answer 41

Tactical.

Question 42

_____ asset allocation is concerned with allocating the wealth of a client among various asset classes, consistent with the clients’ investment objectives, time horizons and risk preferences.

Answer 42

Strategic.

Question 43

Developing cash flow projections and valuations for real estate can be difficult due to:

A. A lack of comparable figures for other properties in the area.
B. Changes in demographic and economic variables.
C. Different financing methods amongst prospective purchasers.
D. A lack of standardized methods for objectively evaluating an investment in a market that is considered inefficient.

Answer 43

B. Changes in demographic and economic variables.

Question 44

_____- end funds are traded on the secondary market.

_____-end funds are traded directly with the fund, not on the secondary market.

Answer 44

Closed.

Open.

Question 45

_____-end funds generally sell at either a premium or a discount to par value. When purchased at a discount, they afford investors an opportunity to realize up-side capital appreciation.

Answer 45

Closed.

Question 46

Additional shares purchased through a DRIP come from the _____.

Answer 46

Company.

They are purchased from the company’s own reserve, which helps them raise more capital.

Question 47

According to fundamental analysis, _____ _____ is the discounted value of a future stream of cash flows. In the case of a stock, its dividends.

Answer 47

Intrinsic Value.

Question 48

____ is a better method for evaluating projects than the IRR method.

-Employs more realistic reinvestment rate assumptions.
-Is a better indicator of profitability and shareholder wealth.
Mathematically will return the correct accept-or-reject decision regardless of whether the project experiences non-normal cash flows or if differences in project size or timing of cash flows exist.

Answer 48

NPV.