Sample Exam 2 Flashcards
At 11 PM EST, an investor in New York buys shares of a company listed on the NYSE. Through which of the following did the investor make this purchase?
A) An organized exchange
B) An over-the-counter market
C) The fourth market
D) The primary market
The correct answer is (B).
The “third market” involves over-the-counter trades of exchange-listed securities after those exchanges have closed.
Which securities law regulates the offering and sale of securities in the primary market and ensures more transparency in financial statements?
A) The Securities Act of 1933
B) The Securities Exchange Act of 1934
C) The Investment Advisers Act of 1940
D) The Investment Company Act of 1940
The correct answer is (A).
The Securities Act of 1933 requires disclosures of new securities in the primary market. The Securities Exchange Act of 1934 focuses on the trading of securities in the secondary market. The Investment Advisers Act of 1940 regulates investment advisers and requires registration with the SEC for firms or any individual advisers with assets under management exceeding $100 million. The Investment Company Act of 1940 forms the backbone of financial regulation and established the foundation for mutual funds and hedge funds.
An investment manager routinely uses technical analysis to outperform his benchmark portfolio. He also finds that fundamental analysis and a little bit of insider trading (which is illegal) provide improved returns. Based on this information, he is investing in a market that is
A) inefficient.
B) weak-form efficient.
C) semi-strong form efficient.
D) strong-form efficient.
The correct answer is (A).
Technical analysis should not provide improved returns in any type of efficient market. This market is inefficient.
A financial advisor manages an equity portfolio for an endowment fund that has an 8.2% return objective. The advisor makes a strategic allocation recommendation that produces a return of 8.5% in an economy that has experienced a 2.9% rate of inflation. The advisor also creates her own benchmark for the fund, which includes multiple indexes that have similar risk profiles of the securities in the fund. The benchmark return during the period is 8.9%. Is the endowment fund satisfied with the advisor’s performance?
A) Yes, because the fund outperformed inflation.
B) Yes, because the fund outperformed the return objective.
C) Yes, because the benchmark return is not relevant.
D) No, because the fund underperformed the benchmark.
The correct answer is (D).
While the fund did return more than the return objective, it still lagged the benchmark return. The fund is not likely to be satisfied with the relative performance, especially since the return objective includes a measure of inflation.
An investor seeking relatively low default risk investments combined with some type of favorable tax treatment and inflation protection should consider which of the following?
A) Revenue municipal bonds
B) Series EE savings bonds
C) Series I savings bonds
D) Series HH savings bonds
The correct answer is (C).
Series I savings bonds offer inflation protection and are default-risk-free. Muni bonds and Series EE savings bonds generally do not offer inflation protection. Series HH bonds are no longer sold.
Which of the following would be considered a private-purpose municipal bond?
A) A bond issued by a city to help pay for a new police station
B) A bond issued by a city to help pay for a new football stadium
C) A bond issued by the federal government to help pay for the military
D) A bond issued by a corporation to help pay for a new factory
The correct answer is (B).
Private-purpose muni bonds are used to finance projects that have some component of private/public use, such as a stadium.
Brandy is considering purchasing an 8-year bond that is selling for $700. What is the current yield for this bond if it has a 6% coupon, paid semiannually?
A) 8.57%
B) 9.32%
C) 10.17%
D) 11.92%
The correct answer is (A).
Current yield = $60/$700 = 8.57%
James is considering purchasing an 11-year bond that is selling for $1,250. What is the current yield for this bond if it has a 6.5% coupon, paid semiannually?
A) 6.5%
B) 5.2%
C) 4.3%
D) 3.7%
The correct answer is (B).
Current yield = $65/$1250 = 5.2%
When an investor sets a bond portfolio’s duration to be equal to the investor’s time horizon, they reduce the portfolio exposure to
interest rate risk.
reinvestment rate risk.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
The correct answer is (C).
A bond is immunized if its duration is matched to the timing of the investor’s cash flow needs. An immunized portfolio has less exposure to both interest rate and reinvestment rate risks.
Which of the following statements about common stock is correct?
A) Most common stockholders have a right to vote on corporate matters.
B) The number of votes per share will be higher for Class A shares than for Class B shares.
C) Bondholders generally have more votes per bond than common stockholders have votes per share.
D) If a dividend payment is missed, a company must repay the missed dividend to common stockholders.
The correct answer is (A).
Most common stockholders have a right to vote on corporate matters. Statement (B) is incorrect because, while different classes of stock generally offer different voting rights, there is no standard convention. Statement (C) is incorrect because bondholders generally do not have any voting rights. Statement (D) is incorrect because this rule applies to cumulative preferred stock.
Which of the following statements regarding mutual funds is (are) true?
In a typical year, mutual fund managers make substantial shifts to their funds’ investments.
Mutual funds regularly issue new shares on the secondary market in anticipation of demand.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
The correct answer is (D).
Statement I is incorrect because mutual fund managers rarely make substantial shifts to their funds’ investments. Statement II is incorrect because investors directly buy shares from the investment manager; shares are never available in the secondary market.
The creation of which of the following is most often linked to the increased popularity of investment companies?
A) Roth IRAs
B) 401(k) Plans
C) The Investment Company Act of 1940
D) The Investment Advisers Act of 1940
The correct answer is (B).
The growth of 401(k) plans in the 1970s and 1980s required individuals to save for their retirement. Investment companies provided an opportunity for investors to save for retirement without dedicating much time and expense to managing their investments.
Which of the following is (are) included in a mutual fund’s expense ratio?
12b-1 fees
Front-end loads
A) I only
B) II only
C) Both I and II
D) Neither I nor II
The correct answer is (A).
While 12b-1 fees are included in a fund’s expense ratio, front-end loads are not.
Which of the following is a reason an investor may use derivative securities?
A) to transfer their portfolio’s risk to another investor.
B) to hedge against price changes in another asset.
C) to seek high returns on a speculative investment.
D) all of the above.
The correct answer is (D).
The primary purpose of derivatives is to transfer risk among market participants. Derivatives may be used to hedge against risk or to seek higher returns with a speculative investment.
Which of the following statements about the prices in a futures contract is correct?
A) As the contract nears its expiration date, the spot price and futures price diverge.
B) The futures price is the price of the asset at some time in the future.
C) Once a futures contract is purchased, its spot price is fixed.
D) A spot price is to a forward contract as a futures price is to a futures contract.
The correct answer is (B).
In a futures contract, the futures price is the price of the asset at some time in the future. Statement (A) is incorrect because, as the futures contract nears its expiration date, the spot price and futures price converge. Statement (C) is incorrect because a contract’s futures price is fixed once it is purchased. Statement (D) is incorrect because a spot price and futures price apply to both forward and futures contracts.
