Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Investments CFP > Quiz Questions > Flashcards

Quiz Questions Flashcards

You may prefer our related Brainscape-certified flashcards:
CFP® flashcards
1
Q

Jerry has 40% of his portfolio invested in an ETF that tracks the S&P 500 and 40% in a mutual fund that tracks the Dow Jones Industrial Average (DJIA) and 20% in government bonds. In order to evaluate the performance of his portfolio, what is Jerry’s best benchmark to use?

A

A combo of S&P, DOW and Govt Bond indices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

An investment policy statement (IPS) should include what?

A

Should include broad guidelines for investor preferences for asset allocation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Should an IPS include specific security selection?

A

No

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Whether its determined by client or advisor, the IPS should include what language

A

language dealing with clients risk tolerance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

A financial adviser that recommends non-actively managed exchange traded funds (ETF’s)is most likely a proponent of which form of the efficient market theory?

A

Strong Form

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Strong form Efficient Market Theory states what Re: public and insider info?

A

Strong form states all public and insider info is reflected in market prices, Therefore, there is no active strategy that will outperform the market on a consistent basis

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

3 types of Efficient Market Theory

A

Strong, Semi-Strong, and Weak

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Is there an active strategy that will outperform the market on a consistent basis?

A

No per efficient market theory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

You are building a portfolio and want to make sure it is properly diversified. Based on correlation, if you are adding one new investment, which one provides the greater diversification benefit?

A. ABC - has a correlation of .50
B. EFG - has correlation of .10
C. RST has corr. of -.27
D. XYZ has corr of -.50

A

D. XYZ has corr of -.50

XYZ provides the best negative correlation so it provides the best diversification

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

People who subscribe to EMT would utilize active of passive management?

A

Passive

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Efficient Market Theory

A

EMT is the proposition that the securities markets are efficient, with the prices of securities reflecting their current economic value.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Maria prefers using index funds in her portfolio. She most likely subscribes to which form of the efficient market theory?

A

Strong - passive investing via index funds will provide equivalent returns at a lower cost than active management

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Which of the following would result in the largest increase in the price of a diversified common stock mutual fund?

A. Unexpected inflation
B. Expected dividend increases
C. Unexpected corporate earnings growth
D. Expected increase in the prime rate

A

C. Unexpected corp earnings growth

n an efficient market, expected market developments, such as those in B and D, would have little or no impact on securities prices. Unexpected inflation, as in A, might cause some increase or decrease in the price of a diversified common stock mutual fund, but a large increase would be produced by C since the price of a common stock mutual fund will be closely related to the earnings of companies whose common stocks are held by the fund.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

In an efficient market, do expected changes in markets have a big impact on prices?

A

No, in an efficient market expected moves are priced in and have little or no impact

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Does the security market line apply to individual securities or portfolios?

A

the security market line applies to both individual securities and portfolios as well

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

The security market line specifies the equilibrium relationship between what and what

A

the equilibrium relationship between expected return and systematic risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

CAPM

A

The Capital Asset Pricing Model (CAPM) relates the required rate of return for any security with the risk for that security as measured by beta.

allows us to measure the relevant risk of an individual security as well as to assess the relationship between risk and the returns expected from investing.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

The market portfolio is

A

the portfolio of all risky assets, with each asset weighted by the ratio of its market value to the market value of all risky assets.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Superior performance exists when the funds performance is ____ the CML

A

above

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Inferior performance exists when the fund is _____ the CML

A

below

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

The best possible combination of risk/reward exists when the funds performance is ___ the CML

A

equal to

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Beta is a measure of

A

Beta is a measure of systematic, non-diversifiable risk.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Rational investors will form portfolios and eliminate what

A

unsystematic risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Systematic risk is the relevant risk for a what

A

well-diversified portfolio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

In a well-diversified portfolio unsystematic risk has been eliminated, so that what risk is the only relevant risk?

A

systematic risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

To find the required return of the stock using the Capital Asset Pricing Model(CAPM), the equation is

A

risk free rate + (market return- risk free rate) * beta of stock= required return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

If T-bills are yielding 3%, T-bonds are yielding 4.5%, and the stock market on the whole is yielding 8%, then one should be willing to buy a stock with a beta of 1.5 only if that stock can be expected to yield at least

A

10.5%

3% + (8%- 3%)1.5= 10.5%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Eight years ago, Justin invested $11,000 in the Gusto Growth Mutual Fund, with all dividends and distributions to be reinvested. Eight years later, Justin liquidated the entire account and received proceeds of $21,000. What was the internal rate of return on this investment?

A

8.42%

Solve for I
N= 8
PV = 11,000 CHS
FV = 21000
I =

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Company ABC is currently trading at $35 and pays a dividend of $2.30. Analysts project adividend growth rate of 4%. Your client Tom requires a rate of 9% to meet his stated goal.Tom wants to know if he should purchase stock in Company ABC

A

Using the constant dividend growth model, this stock has an intrinsic value of $47.80. This is found by dividing next year’s dividend, $2.30(1.04), or $2.39,by the difference between the 9% required rate of return and the 4% growth rate. $2.39/0.05= $47.80. Since the stock is selling at $35.00, the stock is undervalued

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

The following set of newly issued debt instruments was purchased for a portfolio:

Treasury bond
Zero-coupon bond
Corporate bond
Municipal bond

The respective maturities of these investments are approximately equivalent.Which one of the investments in the preceding set would be subject to the greatest relative amount of price volatility if interest rates were to change quickly?

A

The zero-coupon bond has the longest duration (equal to its maturity), so it would have the greatest price volatility

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Is price a determinant in finding duration?

A

No - price is a function of the market rate of interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

The duration of a bond is a function of its:
(1) current price.
(2) market interest rate.
(3) number of compounding periods until maturity.
(4) coupon rate.

A

2 3 and 4 - price is not a determinant of duration

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

What 3 things determine the duration of a bond

A

-Market interest rate
-# of compounding periods to maturity
-Coupon rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Which of these bonds has the greatest interest rate risk?; Which of these bonds has the longest duration?

A. U.S. Treasury bond with an 11.625% coupon, due in 2004 with a price of $142.50 and a YTM of 6.3%

B. U.S. Treasury strip bond (zero coupon) due in 2004 with a price of $46.75 and a YTM of 6.25%

C. Corp B-rated bond with a 9.75% coupon, due in 2004 with a price of $104.75 and a YTM of 8.79%

A

B and B

The interest rate risk is greatest for the security that has the lowest coupon rate. The longest duration is found in the bond that pays no interest except atthe time of its maturity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

ABC stock is selling for $43 per share and a call option with a three-month expiration maybe bought for $4 per share with a strike price of $45. This option may be said to be:

A

Out of the money

When the strike price is greater than the current stock price, the call option is out of the money.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

A long strangle is created on a $40 stock with a call with an exercise price of $50 andpremium of $3 and a put with an exercise price of $30 and a premium of $1. If the stock price is $20 at maturity, what is the net before-tax per share dollar return on this position?

A

$6

A long strangle is the purchase of out-of-the-money call and put options. The cost of the position is $(4) (-3 -1). At a stock price of $20, only the put is exercised. The stock is purchased for $20 in the market to be sold for $30 by exercising the put. The total dollar return is -20 + 30 - 4 = $6

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

Compared to traditional investments, alternative investments are most likely to be categorized by low

A

liquidity of the underlying investments

Alternative investments generally have the qualities of high use of leverage,higher research costs, and higher fees than traditional investments. Alternative investments generally exhibit low liquidity of the underlying investments

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

A call option with a strike price of 110 is selling for 3.50 when the market price of the underlying stock is 108. The intrinsic value of the call is

A

0

A call option does not have any intrinsic value until it is “in the money,” meaning that the price at which the call may be exercised, or the strike price of 110 in the present case, is lower than the market price of the underlying stock.In this case, the market price is 108, or less than the strike price, so the intrinsic value of the call is zero

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

An investor is most likely to consider adding alternative investments to an investment portfolio that holds traditional asset classes because they

A

provide lower correlation to a portfolio and may possibly provide higher returns

The historically higher returns to most categories of alternative investments compared with traditional investments result in potentially higher returns to a portfolio containing alternative investments.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

With the same dollar investment, which of the following strategies can cause the investor to experience the greatest loss?

A

selling a naked call option

selling a naked call option presents an unlimited potential for loss since the price of the stock may rise dramatically,perhaps doubling, tripling, quadrupling or more in value, before the option expires.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

A corn farmer wants to protect against the possibility of falling prices. What is the type of hedge position the farmer should enter in corn futures contracts and the reason for that position?

A

A short position to hedge against lower corn prices

The profit on the short corn position, if corn declines, will help to offset lower corn prices.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

Jason sells ABC company stock at a loss on July 1. On what date may Jason repurchase ABC stock without his loss being disallowed?

A

August 1

An investor may place a purchase of a stock at 31 days after the sale to allow the tax loss.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

On February 1, Sara buys 200 shares of PLM company stock for $50 per share. On August 1, Sara sells all 200 shares of PLM stock for $25 per share. On August 16, Sara buys 100 shares of PLM stock for $30 per share. How much of a loss on PLM stock may she claim for the year?

A

$2500

When Sara sells the 200 shares of PLM on August 1, she books a loss of $5,000. However, the loss related to half of those shares is disallowed because she re-purchased half of those shares within 31 days of the shares being sold on August 16.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

Which form of efficient market theory supports technical analysis?

A

None of them

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

Because a call feature on a bond makes it less attractive, the bond issuer must do what regarding the yield?

A

Offer a higher yield making it more attractive to buy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

Out of the following, which will reduce the yield?

  1. Put
  2. Call
  3. Warrant
  4. Convertible
A

Put, Warrant and Convertible

These features make the bond more attractive so the issuer can offer a lower yield

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

Out of the following - which is a disadvantage of owning individual bonds?

A. Excessive transaction costs with buying and selling individual bonds could pose a problem.
B. Bond index funds have essentially replaced the need for individual bond purchases.
C. Bond mutual funds are the superior alternative
D. Yield spreads are difficult to calculate.

A

A. Excessive transaction costs with buying and selling individual bonds could pose a problem

B is an incorrect statement.
C is a statement that cannot be supported.
D does not address the question in an appropriate manner

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

Have bond index funds replaced the need to own individual bonds?

A

No per the test

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

If you write a put or call, what happens to the premium when the option is exercised?

A

You keep the premium no matter what

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

A call writer believes the market will likely be what moving forward

A

stable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

Does the writer of a call or put forfeit the premium once it’s been exercised?

A

No they keep the premium no matter what

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

How do you find current yield of a bond?

A

Current income/current price of bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

Is turnover a factor for individual stocks and bonds?

A

No

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

What type of investment would have you concerned with turnover?

A

Open end fund

within an open end fund when considering the cost and tax efficiency of the fund

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

Which has lower turnover - index fund or open ended fund?

A

Index fund

Index funds usually have much lower turnover than open end funds.

56
Q

Bond ladder does what re: maturities

A

spread the maturities out equally over a long period of time

57
Q

Put/Call Ratio, Relative Strength, 50 Day moving average all fall under what part of EMT?

A

None - these are all technical analysis terms and are no supported by EMT

58
Q

Assume that a company has total assets of $3.0 million, total liabilities of $1.2 million, preferred stock of$0.5 million and 5,000 shares of common stock. The book value per share of common stock is

A

$260

3mil - 1.2 mil - .5 mil = 1.3mil/5000 = 260
Total book value = assets - liabilities - preferred

59
Q

Interest rate risk is greatest for the security with the lowest what?

A

coupon rate

60
Q

Cumulative preferred stock - if a dividend is missed what must happen?

A

Cumulative preferred stock must pay missed dividends before common shareholders can receive dividends

61
Q

Book value per share formula

A

Total book val = assets - liabilities - preferred

62
Q

An advantage of owning common stock

A

participation in the growth of the firm via dividends or capital gains

63
Q

Would common stock have guaranteed cashflow via dividends?

A

No - common stock can suspend dividend payments

64
Q

If a bond is selling at a discount, what will you receive at maturity?

A

A capital gain

65
Q

If a bonds coupon is 4.8% and its selling at 5.8%, the bonds price is what vs par

A

discounted

66
Q

What is the item adjusted on a TIPS?

A

the principal amount

67
Q

Series I bonds adjust rates how often

A

every 6 months, tied to inflation

68
Q

Are series EE bonds tied to inflation?

A

No

69
Q

How often are series EE bonds adjusted?

A

every 6 months

70
Q

When did the government stop issuing series HH bonds?

A

August 2004

71
Q

Debenture is

A

unsecured corporate debt

72
Q

Some risks affecting corporate bonds?

A

Liquidity risk
interest rate risk
default risk
purchasing power (inflation) risk

73
Q

Will a closed end company redeem its outstanding shares?

A

not normally

74
Q

Which is riskier sector fund or growth fund?

A

Sector funds are riskier than growth funds as they give up diversification to invest in a certain sector of the market.

75
Q

Balanced funds have what risk tolerance

A

Balanced funds are conservative. They usually invest in a mix of bonds and stocks.

76
Q

which is riskiest?
balanced funds, growth funds, sector funds, hedge funds

A

Hedge funds use leverage,making them the riskiest funds in this group.

77
Q

Orion mutual fund has a portfolio of 300 stocks with a total market value of $700 million. The fund also has$30 million in liabilities. If the mutual fund has 15 million shares outstanding, what is the net asset value(NAV)?

A

NAV= (market value of portfolio- liability)/shares = (700-30)/15 = $44.67

78
Q

Negative skewness

A

A bell curve whose left side tail is longer than the right side

79
Q

What is the standard deviation of returns given returns of 9%, 6%, 2%, -5%?

A

The average return is: (9 + 6 +2-5)/4 = 12/4 = 3%.
The variance is [(9-3)2+ (6-3)2+ (2-3)2+ (-5-3)2]/ (4-1) = [36+9+1+64]/3= 110/3= 36.67.
The standard deviation is 36.67 squared= 6.06%

80
Q

Revenue municipal bonds are subject to which of the following investment risks?
(1)Default risk
(2)Unsystematic risk
(3)Reinvestment rate risk
(4) Sovereign risk

A

1, 2, and 3

All municipal bonds are subject to reinvestment rate risk because the coupon payments must be reinvested at the same rate in order to maintain the yield-to-maturity. Defaults can happen with revenue municipal bonds.Because there are specific attributes related to the revenue structure that is backing these types of bonds, there is unsystematic risk.

81
Q

If the mean return for Sarconics, Inc. is 16% and the standard deviation is 4%, what will the range of returns be within two standard deviations?

A

Between 8% and 24%

At two standard deviations, approximately 95% of the outcomes will fall between [16%-(2x4%)] = 8%, and [16%+(2x4)] = 24%

82
Q

A client desires to purchase 500 shares of a stock only when the price gets to a certain level and is worried about a sudden stock movement once the price is near that level. The most appropriate market order for this client would be

A

Limit order

The client is newly buying the shares, which would point to a Market Order or a Limit Order. The client’s concern about sudden price movements makes the Limit Order the correct choice

83
Q

Your client purchased 100 shares of XYZ Corporation stock at $40 per share and deposited 50% of the purchase price for initial margin requirement. If the maintenance margin is 35%, at what price will your client receive a margin call?

A

2000 / 1 - .35)

2000 / .65 = 3076.9 = $30.77

84
Q

Your client purchased 100 shares of XYZ Corporation stock at $40 per share and deposited 50%of the purchase price for initial margin requirement. If the maintenance margin is 30%, the client will receive a margin call of $28.57. Assume the client enters into the margin loan agreement and buys XYZ stock. If the price drops to $28, how much money will the client have to put up to satisfy the margin agreement?

A

If the price drops to $28, then the total value= $2,800, and the net equity is ($2,800-$2,000)/$2,800=28.6% equity, less than the 30% maintenance margin required. The additional dollars needed to meet the maintenance margin requirement: 0.30*$2,800=$840-$800= $40

85
Q

Smith invests in a limited partnership which requires an outlay of $9,200 today. At the end of years 1 through 5, he will receive the after-tax cash flows shown below. The partnership will be liquidated at the end of the fifth year. Smith is in the 28% tax bracket.

0 ($9,200) CFo
1 $600 CF1
2 $2,300 CF2
3 $2,200 CF3
4 $6,800 CF4
5 $9,500 CF5.

Which of the following statements is/are correct?
(1)The IRR is the discount rate which equates the present value of an investment’s expected costs to the present value of the expected cash inflows.
(2)The IRR is 24.18% and the present value of the investment’s expected cash flows is $9,200.(3)The IRR is 24.18%. For Smith to actually realize this rate of return, the investment’s cash flows will have to be reinvested at the IRR.(4) If the cost of capital for this investment is 9%, the investment should be rejected because its net present value will be negative

A

1,2 and 3

(1) is correct, by definition, since the IRR is the rate that equates the present value of theFeedback:project’s inflows with the present value of its outflows, thereby producing a new present value of zero. (2) is correct, by definition of the internal rate of return. That is, if the inflows are discounted at a 24.18% rate of interest, they will produce a present value that is equal to the present value of the one outflow of $9,200. (3) is correct. It is an assumption of the IRR methodology that any cash flows spun off by an investment are reinvested at the internal rate of return of that investment. (4) is incorrect. With the same data in the calculator as were entered in Question 21, now enter 9 as the value of “I” and compute the net present value. It is a positive $5,976.77.

86
Q

Smith invests in a limited partnership which requires an outlay of $9,200 today. At the end of years 1 through 5, he will receive the after-tax cash flows shown below. The partnership will be liquidated at the end of the fifth year. Smith is in the 28% tax bracket

0 ($9,200) CFo
1 $600 CF1
2 $2,300 CF2
3 $2,200 CF3
4 $6,800 CF4
5 $9,500 CF5

The after-tax IRR of this investment is?

A

On the financial calculator, enter a negative $9,200 as the initial cash flow. Then, enter the remaining positive cash flows at the end of years 1,2,3,4 and 5, as indicated the problem.The internal rate of return is 24.18%. Note that the fact that Smith is in the 28% tax bracket is irrelevant to this answer since the cash flows are identified in the question as being after-tax flows.

87
Q

JKL portfolio has a realized return of 15% over the last several years and a beta of 1.10. The 3-month Treasury bill is currently yielding 4%.The S&P Index has a realized return of 12% and a beta of 1.00. If the tracking error is 0.015, what is the information ratio of portfolio JKL?

A

2

The information ratio is found as follows:
Return of portfolio- Return of benchmark/Tracking error=

(0.15- 0.12)/ (0.015) = (0.03/0.015) = 2.0

88
Q

Bond A has a 6% annual coupon and is due in 2 years. Its value in today’s market is $900.
Bond B has a 10% annual coupon and is due in 4 years. It is priced to yield 12%.
Bond C is a 9% zero-coupon bond priced to yield 11% in 8 years.

The yield to maturity of Bond A is closest to

A

11.9%

To find the yield to maturity of Bond A, on your financial calculator enter$1,000 as the FV, $900 +/- as the PV, $60 as the end-of-period PMT, and 2 as the value of n. Solver for i,which is 11.90%

89
Q

Stock XYZ has a standard deviation of 3% and an expected return of 12%, and Stock ABC has a standard deviation of 5% and an expected return of 16%. Which stock has substantially more risk than the other?

A

Stock ABC has substantially more risk than XYZ

The coefficient of variation is found by dividing the standard deviation by the expected return.

For Stock XYZ, the coefficient of variation is 3%/12%= 0.25. For Stock ABC, the coefficient of variation is 5%/16%= 0.31. Stock ABC carries more risk per unit of return

90
Q

The coefficient of variation is

A

standard deviation/expected return

how many units of risk/units of return

91
Q

To immunize a bond portfolio over a specific investment horizon, an investor would do what?

A

Match the average weighted duration of the bond portfolio to the investment horizon

92
Q

Dollar cost averaging

A

The essence of dollar-cost averaging is to invest the same dollar amount in each period, regardless of the number of shares that that dollar amount can purchase.

93
Q

When dollar cost averaging, do you buy the same number of shares each time?

A

No - same $ amount each time. Because the share price will change you most likely will not buy the same amount of shares each time

94
Q

A client has a cash need at the end of seven years. Which of the following investments might initially immunize the portfolio?(1)a 9-year maturity coupon bond
(2) a 7-year maturity coupon Treasury note
(3) a series of Treasury bills

A

9 year maturity coupon bond

Immunization of a portfolio involves matching the portfolio’s duration with the duration of the investor’s cash needs. A 7-year maturity coupon Treasury note would have a duration of less than seven years. Similarly, a series of Treasury bills would have a very short duration. A 9-year maturity coupon bond, on the other hand, will have a duration of less than nine years, perhaps something in the neighborhood of seven years

95
Q

Treynor Index

A

The Treynor index uses beta as the measure of risk and graphically displays the risk/return tradeoff.

96
Q

Does CML use standard deviation or beta?

A

Standard deviation

97
Q

Which of the following is the benchmark line that corresponds to the graphic display of the Treynor index?

A. Security Market Line
B. Capital Market Line
C. Efficient Frontier
D. All of the Above

A

A. Security Market Line

The Treynor index uses beta as the measure of risk and graphically displays the risk/return tradeoff.The CML uses the standard deviation, not beta, in estimating expected return and risk displays.

98
Q

The main difference between the three forms of market efficiency is that

A

The definition of information differs

99
Q

A strategy of buying several bonds with staggered maturities is an example of

A

Bond ladder

100
Q

Lynn Taylor, an investor from London, has the following portfolio:25% US small cap stocks, 30% laddered US treasuries, 10% US equity REITs, and 35%S&P Index fund. What risks is she exposed to?

A

Default risk, exchange rate risk, reinvestment rate risk

101
Q

A portfolio has a standard deviation of 25%. The correlation of the portfolio and the market is 1. If the risk-free rate is 3.2%, the expected return on the market portfolio is 11%, and the standard deviation of the market portfolio is 27%, what is the required return on the portfolio?

A

10.42%

102
Q

Mr. and Mrs. Johnson sold 1000 shares of LPK Corp. stock, with a cost basis of $27 per share for $20 per share. The shares had been held for 4 years after purchase date. How much of the loss can the couple claim for the year, ignoring any other potential transactions?

A

$3,000

103
Q

Which type of order would be used to stop losses from a short sale? Assume you short sell at the current market price

A

A stop buy order with the stop price set above the current market price

104
Q

How much does Justina need to deposit at the beginning of the next 8 years to have $100,000, assuming that she is able to earn 6.5% on her investments?

A

$9,318

105
Q

The appropriate measure of risk for a portfolio that isn’t well diversified is

A

Standard Deviation

106
Q

John saved $40,000 for a down payment on a condominium. He is now actively looking for his dream house and anticipates making an offer on a condo within the next 6 weeks. If the offer is accepted, it will take up to three additional months to close on the condo. John will need to deposit about $1,500 in an escrow account as good faith money when he makes the offer. The rest of the down payment is made at closing. The best place for John to deposit his funds now is

A

money market mutual fund

107
Q

Jeremy is planning to retire in twenty years and is considering adding bonds to his tax-deferred retirement accounts. The type of fixed income investment that would be best for Jeremy is

A

Corporate bonds

108
Q

In the accumulation phase of the investor’s life

A

Investors may seek to gain wealth through investing in higher risk investments.

109
Q

A mutual has a beta of 1.2. This means the fund

A

Is more volatile than the market as a whole

110
Q

Tabatha pays 15% in dividends and capital gain taxes and 35% in ordinary income taxes. In January, she purchased 500 shares of a no-load mutual fund for $36 a share and all distributions are reinvested. In October, she sold 100 shares for $40. At the end of the year, she received a statement stating the fund had distributions to her of $200 in qualified dividend income, $1,000 in long-term capital gains, and $1,500 in short term capital gains. What are Tabatha’s taxes on this investment

A

$845

111
Q

Assume a portfolio is made up of the following securities:
Security A represents 30% of the total and earned 11%
Security B represents 25% of the total and earned 10%
Security C represents 15% of the total and earned 8%
Security D represents 30% of the total and earned 5%
What is the weighted average (mean) rate of return on the portfolio?

A

For Security A: .3 * .11
For Security B: .25 * .1
For Security C: .15 * .08
For Security D: .3 * .05

Now, add these values:

Therefore, the weighted average rate of return on the portfolio is 8.5%

112
Q

An investment cost $6,500, and will have a cash flow of $1,500 in the first year, $1,800 in the second year and $200 in the third year, at which time the investment will be sold for $8,000. What is the internal rate of return (IRR) of this investment?

A

25%

113
Q

A mutual fund has a portfolio of 275 stocks with a total market value of $950 million. The fund also has $40 million in liabilities. If the mutual fund has 15 million shares outstanding, what is the net asset value (NAV)?

A

$60.67

114
Q

A $1,000 par corporate bond with a coupon of 4% that pays interest semiannually is currently selling for $1,050. The current yield on this bond is

A

3.8%

115
Q

An investor purchases 400 shares of stock at a price of $20 per share. The initial margin requirement is 70%. What is the smallest amount that the investor can put up to satisfy the initial margin requirement?

A

$5,600

116
Q

What affects the estimated P/E ratio?

A

Dividend growth rate
Dividends payout ratio
Required rate of return

117
Q

In evaluating an income-producing property, what are some factors to take into account?

A

Projected rental income
Reinvestment rates
tax consequences

118
Q

Jason’s advisor recommended that he purchase 1,000 shares of a mutual fund that is currently priced at $15 per share. The commission on this purchase is 2%, and the fund charges a 1% annual management fee and a $20 annual administrative charge. What is the total cost over the first year to invest in this fund?

A

$15,470

$15,000 * 1.03 + 20 = 15470

119
Q

A bear spread-put is when the investor sells a(n)

A

Out-of-the money put and buys an in-the-money put option

120
Q

GFC Corp. is expected to pay $1.65 per share in annual dividends next year. If the anticipated growth rate is 4% and the current stock price of the stock is $25 per share,what is the expected return on this stock?

A

10.6%

The expected return on a stock can be calculated using the Gordon Growth Model, which is a model used to determine the intrinsic value of a stock, excluding external factors such as market conditions. The formula for the Gordon Growth Model is:

Expected Return = (Dividend per share / Price per share) + Growth rate

In this case, the dividend per share is $1.65, the price per share is $25, and the growth rate is 4% (or 0.04 when expressed as a decimal).

So, the expected return would be calculated as follows:

Expected Return = ($1.65 / $25) + 0.04

This calculation gives us an expected return of 0.106 or 10.6%

121
Q

As of January 1, Audrey owns 5,000 shares of stock in a given company. The company pays $0.50 per share in dividends each quarter. She decides to reinvest her dividends in the company stock. The share prices on the quarterly dividend payment dates are$32, $42, $38, and $43. How many shares does Audrey have at the end of the year?

A

5266.7 shares

122
Q

Where do you hit to run standard deviation?

A

Button right next to weird E key

123
Q

Series E and Series I are both adjusted twice a year but what is the difference?

A

Series I is tied to inflation think I for inflation - Series E is not tied for inflation

124
Q

Are ETFS always equal to NAV?

A

No - they may be sold at a premium or discount to NAV due to supply and demand

125
Q

If the question is asking about the risk adjusted return of a portfolio which ratio will you use?

A

Treynor

126
Q

If a question is asking about realized return on a portfolio which ratio would you use?

A

Treynor

127
Q

One way they will trick you on bond questions is saying the coupon is annual

A

so you would not do 2x like a regular bond

128
Q

Coefficient of Variation is higher means what

A

That its more risky

129
Q

A series of T bills would have what duration?

A

Very short

130
Q

Bond immunization deals with Duration! Not what?

A

Not maturity!

131
Q

A good Treynor ratio is high or low?

A

High - just like sharpe

132
Q

Is IRR always equal to time weighted return?

A

IRR equals dollar weighted return but not time weighted return

133
Q

Time weighted return is equal to what average?

A

geometric average

134
Q

IRR equals dollar weighted return think I$$

A

IRR = I$$

135
Q

Interest rate risk is highest for the bond with the what coupon?

A

Lowest - think interest rate is HIGHEST for the LOWEST coupon- opposites

136
Q
A

Investments CFP (14 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions