Module 6 Quiz

Question 1

Which of the following rights do owners of common stock normally have?

I. Voting rights
II. Dividend rights
III. Preemptive rights

Answer 1

I. Voting rights
II. Dividend rights
III. Preemptive rights

Question 2

Returns from common stock are in the form of _____.

Answer 2

Dividends and capital appreciation

Question 3

Which of these assets is considered the most liquid?

Answer 3

Money market mutual funds

Question 4

A general disclosure of the annual operating expenses of a mutual fund is represented by _____.

Answer 4

An expense ratio

Question 5

Which of the following is NOT a type of systematic risk?

Answer 5

Event

Question 6

Which of the following types of debt is issued by municipalities?

Answer 6

Revenue bonds

Question 7

A general risk component representing the variability of a stock’s total return as it directly relates to overall movements in the general economy is known as _____.

Answer 7

Systematic risk

Question 8

A privately held company may go public through _____.

Answer 8

Making an initial public offering (IPO)

Question 9

Leslie purchased a 10-year bond with an annual coupon rate of 4.75% paid semiannually. The bond has a current market price of $1,035. What is the bond’s yield to maturity (YTM)?

Answer 9

4.32%

2 P/YR, END mode, C ALL
1035, +/-, PV
1000, FV
23.75, PMT (4.75% x 1000 / 2)
10, downshift, N (20 compounding periods)
Solve for I/YR = 4.3154

Question 10

Which of these is a disadvantage of investing in real estate?

Answer 10

Illiquidity

Question 11

Which of these is the risk that can be eliminated with a well-diversified portfolio?

Answer 11

Unsystematic risk

Question 12

Jason wants to purchase a bond that will provide him a steady income with low default risk. As a result, he wishes to purchase an investment-grade bond through his stockbroker. Among these choices, what would be the lowest bond rating by Standard & Poor’s that would still be considered investment grade?

Answer 12

BBB

Question 13

Which of the following is least likely to be considered a constraint when preparing an investment policy statement?

Answer 13

Risk tolerance

Question 14

Business risk is a type of _____.

Answer 14

Unsystematic risk that includes the firm’s ability to make a profit

Question 15

Each of these is an advantage of investing in mutual funds except _____.

Answer 15

High portfolio turnover

Question 16

Jordan and Pat, ages 45 and 43 respectively, would like to diversify their portfolio. They are considering real estate as a possible alternative. Which of these investments would offer the couple the opportunity to participate indirectly in the real estate market?

Answer 16

Real estate investment trust (REIT)

Question 17

Mike owns a corporate bond that is currently trading at $992. The annual interest (coupon) payment is $35 per year. What is the current yield of the bond?

Answer 17

3.53%

$35/$922

Question 18

An effective investment policy statement should accomplish all of these except _____.

Answer 18

Guarantee the portfolio will achieve a positive rate of return

Question 19

Which one of these would be identified as a threat when developing a SWOT analysis for a client?

Answer 19

Inflation may be increasing in the coming years

Question 20

Which of the following is NOT one of the three main investment mutual fund objectives?

Answer 20

Asset allocation

Question 21

Which of the following statements about bond pricing is CORRECT?

Answer 21

If a bond is issued when interest rates are at 5%, and interest rates increase to 6%, the bond would then be selling at a premium

Question 22

Which of these is an advantage of investing in mutual funds?

Answer 22

Diversification

Question 23

Nefeli has earned 9% on her five-year investment to buy a car. She is in a 22% federal and a 3% state marginal income tax bracket. The inflation rate has averaged 2.4% over the past five years. What is her tax- and inflation-adjusted return?

Answer 23

4.25%

Tax-adjusted return: 0.09 x (1 - 0.25) = 0.0675 = 6.75%
Tax- and inflation-adjusted return:
[{0.0675 + 1) / 1.024] - 1 = (1.0675 / 1.024) - 1 = 1.0425 - 1 = 0.0425 = 4.25%

Question 24

Fund T has an average return of 7.5% and a beta of 1.1. Fund W has an average return of 6.8% and a beta of 0.9. Which fund should you purchase and why?

Answer 24

Fund W because it has a higher risk-adjusted return

Fund T: 7.5 / 1.1 = 6.82%
Fund W: 6.8 / 0.9 = 7.56%

Question 25

Which of the following statements concerning standard deviation is CORRECT?

Answer 25

Standard deviation is a measure of the dispersion of returns around the mean

Question 26

Which of these statements about no-load mutual funds is CORRECT?

Answer 26

There are numerous no-load funds with various investment styles and objectives

Question 27

Which of the following statements concerning the buy-and-hold investment strategy is CORRECT?

Answer 27

This strategy of buying and holding investments minimizes transaction costs in the buying and selling of securities

Question 28

For which of the following investors would U.S. Treasury bills be most appropriate?

Answer 28

Jack and Krissy, ages 65 and 63, conservative risk tolerance, need for liquidity and safety of principal

Question 29

Fred has the following amounts on deposit at the same bank.

Savings - Fred - $200,000
Traditional IRA - Fred - $300,000
CD - Joint - $400,000

How much FDIC insurance coverage does Fred have for his accounts at the bank?

Answer 29

$650,000

Question 30

Lorenzo, age 42, has a 401(k) plan and is unsure of where to invest. He wants a diversified portfolio of both stocks and bonds but has no idea about which funds to choose and how much to put into each fund. He plans to retire in about 19 years and only wants to choose one fund. Given Lorenzo’s situation, which of these funds available in his 401(k) would be the best choice?

Answer 30

Target date fund