Series 7 STC Portfolio & Market Analysis (Ch. 15) Flashcards
A client is interested in making a mutual fund investment. The client is 32 years old, single, has an annual salary of $375,000, and recently received a sizable bonus to be used as the down payment to purchase a beachfront home within the next 12 months. What’s the MOST appropriate recommendation for investing the funds from the bonus?
A combination of a Treasury bond fund and a S&P 500 Index fund
A combination of an asset allocation fund and a municipal bond fund
A municipal money market fund
An equity income fund
A municipal money market fund
Of the choices listed, the most appropriate recommendation is the municipal or tax-free money market fund, which combines the need for preservation of capital and tax-free interest. The investor needs the funds within one year and is in a high tax bracket. Although it may initially seem as though this client is the perfect candidate for a growth portfolio, his investment time horizon is not long enough. Before designing an investment program for a customer, an RR must determine the investor’s time horizon. Investors with short time horizons typically require more stable, conservative investments since they will need their money sooner. Based on this client’s short time horizon, equity investments are unsuitable.
Which Bond Buyer Index is used to analyze the most actively traded municipal securities?
The 20 Bond Index
The 11 Bond Index
Bond Buyer Municipal Bond Index
The SIFMA Index
Bond Buyer Municipal Bond Index
The Bond Buyer Municipal Bond Index represents the average of the prices of 40 recently issued and actively traded municipal bonds.
T/F. The 11 Bond Index is an index based on the average yield of 11 municipal bonds that mature in 20 years and carry an average AA rating
True
A sell stop order is likely entered by a technical analyst or chartist:
Below a support level for the stock
Above a resistance level for the stock
Below a previous low for the stock
To take advantage of a rising market
Below a support level for the stock
Sell stop orders are entered below the current market. Specifically, a sell stop order is most likely entered by a technical analyst (chartist) below a support level for the stock. If the price of the stock goes below the support level, it will be a breakthrough on the downside, which is a bearish indication. Once the stop price has been reached, the stock will be sold at the market.
T/F. The Bond Buyer 20 Bond Index (BBI) is a theoretical average of the yields of a group of municipal bonds that mature in 20 years.
True
Senior investors who have a joint account are seeking preservation of capital. They want to use most of the assets in this account to provide funds to their grandchildren so they’re able to make down payments on their first homes. Which recommendation is MOST suitable?
A portfolio of 4-week, 26-week, and 52-week Treasury bills
A portfolio of investment-grade municipal bonds
A portfolio of Fannie Mae and Freddie Mac collateralized mortgage-backed securities
A portfolio of Treasury notes and Treasury bonds
A portfolio of 4-week, 26-week, and 52-week Treasury bills
Investors who are concerned about the potential loss of their capital will invest in securities that provide safety. Although they want to achieve a return on their investment, these investors don’t want to put their principal at risk. Although T-bonds and T-notes are not subject to default risk, they do expose customers to significant interest-rate risk. On the other hand, T-bills protect clients against both default risk and interest-rate risk because they’re short-term. Senior investors with a preservation of capital objective often invest in short-term debt instruments, such as U.S. government T-bills, insured certificates of deposit, or money-market funds.
Which of the following statements is TRUE regarding technical market theories?
An increase in short interest from one month to another is a bearish indicator.
A high put/call ratio indicates that the mood of investors is bearish.
The odd-lot theory states that investor should sell stocks when small investors are selling.
The advance-decline theory states that it’s a bullish indicator if there’s a positive advance-decline figure.
The advance-decline theory states that it’s a bullish indicator if there’s a positive advance-decline figure.
Advance-decline figures measure the number of stocks that have increased compared to the number that have decreased during a trading session or other period. According to this theory, it’s a bullish indicator if there’s a positive advance-decline figure (i.e., more advancing issues than declining issues). However, it’s considered bearish if the market averages (e.g., the Dow Jones Industrial Average) are up, but the advance-decline figures are negative. Regarding the other choices, the statements are false and their opposites are true. An increase in short interest is bullish because of the eventual price increase as short sellers cover their short positions. A high put/call ratio suggests that the market is overly bearish and that stocks may rebound. On the other hand, a low put/call ratio suggests that market exuberance may result in a sharp decline.
A 60-year-old customer has an income objective, but is very concerned that the value of his account will not keep pace with inflation. Which recommendation is MOST suitable?
A high-yield bond fund
A Nasdaq 100 Index fund
A convertible bond fund
A variable annuity
A convertible bond fund
Of the choices listed, the convertible bond fund is a hybrid of debt and equity and is the most suitable since it provides income, capital appreciation, and is a good hedge against inflation. A high yield bond fund could provide income, but it does so with an increase in default risk. The index fund may not provide much income and a variable annuity should only be recommended if the customer is seeking tax-deferred growth.
Which of the following statements is TRUE?
The Russell 2000 index tracks both large and small capitalization companies.
The Wilshire Index tracks both large and small capitalization companies.
The Dow Jones Industrial Average (DJIA) is the broadest measure of the U.S. equity market.
The S&P 500 Index tracks stocks that trade in both the U.S and international equity markets.
The Wilshire Index tracks both large and small capitalization companies.
The Wilshire Associates Equity Index consists of almost all stocks that trade on the NYSE and Nasdaq. The index represents both large and small capitalization companies and is considered the broadest of all indexes and averages. The Russell 2000 tracks only small capitalization companies, the DJIA consist of only 30 stocks, and the S&P 500 tracks only companies whose stocks are traded in the United States.
If a stock’s beta is less than 1, which of the following statements is TRUE?
It’s expected to outperform when the market is up, but underperform when the market is down.
It’s expected to underperform when the market is up, but outperform when the market is down.
It’s expected to perform equal to the market.
It’s expected to underperform when the market is up, but underperform when the market is down.
It’s expected to underperform when the market is up, but outperform when the market is down.
If a stock’s beta is less than 1, it’s expected to underperform when the market is up, but outperform when the market is down. If a stock’s beta is more than 1, it’s expected to outperform when the market is up, but underperform when the market is down. If a stock’s beta is equal to 1, it’s expected to perform at the same rate as the market.
As it relates to the Capital Asset Pricing Model (CAPM), the term “risk premium” is:
Beta
Alpha
The return of the market
The difference between the return of the market and the risk-free rate
The difference between the return of the market and the risk-free rate
As it relates to CAPM, the term “risk premium” is defined as the difference between the return of the market (S&P 500 Index) and the risk-free rate of return (Treasury rate).
If a stock’s price has a breakout below the support level, what type of indication is this?
It’s an indication that the stock’s price is highly volatile.
It’s an indication that the stock is going through a period of consolidation.
It’s considered a bullish signal.
It’s considered a bearish signal.
It’s considered a bearish signal.
A breakout occurs when the stock’s price either increases above a resistance level or declines below a support level. A breakout below the support level (i.e., the floor) is a bearish signal.
The EAFE Index is a mutual fund that tracks ________ companies
Foreign
Modern Portfolio Theory (MPT) focuses on:
Choosing individual securities with the highest return and lowest risk
Choosing individual sectors with the highest return and lowest risk
Choosing asset classes with the highest return and lowest risk
Choosing asset classes with the highest return and no risk
Choosing asset classes with the highest return and lowest risk
Modern Portfolio Theory focuses on creating optimal portfolios based on a client’s risk tolerance and investment objectives by allocating the portfolios among various classes of securities. The MPT doesn’t focus on individual securities or sectors, and doesn’t avoid risk. Instead, it focuses on diversifying investments across a wide spectrum of securities.
Which of the following terms refers to a set of optimal portfolios that provide the highest expected return for a given level of risk, or the lowest risk for a desired expected return?
CAPM
Efficient frontier
Duration
Alpha
Efficient frontier
The efficient frontier is a graph that:
Shows a stock’s sensitivity to movement in the overall market
Analyzes a bond’s sensitivity to interest rate fluctuations
Compares the returns of high yield bonds to the returns of low yield bonds
Shows optimal portfolios that provide the highest return for a given level of risk
Shows optimal portfolios that provide the highest return for a given level of risk
According to the Modern Portfolio Theory, the efficient frontier is a graph of optimal portfolios that provide the highest return for a given level of risk.
If the oil and gas sector has been increasing and has shown high volume for several days, what term BEST characterizes this situation?
Value analysis
Momentum investing
Top-Down analysis
A resistance level
Momentum investing
The term “momentum investing” or “market momentum” is used to describe a situation in which prices are moving in a certain direction and there’s a high level of trading volume. With this situation, investors often move rapidly from one sector of the market to another—essentially in an effort to chase money flows. For example, if oil and gas stocks are in favor, these investors will overbuy in that area. However, if auto stocks are subsequently moving higher, they will rapidly change focus.
An investor has an equity portfolio that consists mainly of domestic companies. If an RR wants to diversify the client’s portfolio to include foreign companies, which of the following investment products will MOST LIKELY achieve this goal?
A mutual fund that tracks the FTSE Index
A mutual fund that tracks the EAFE Index
An ETF that tracks the S&P 500 Index
A mutual fund that tracks the Wilshire Index
A mutual fund that tracks the EAFE Index
The MSCI EAFE (Morgan Stanley Capital International Europe, Australasia, and Far East) Index follows the equity performance of the developed markets, but excludes the U.S. and Canada. The FTSE Index mostly follows the stocks of companies that trade on the London Stock Exchange.
A customer in his early 40s, recently received a sizable bonus, and his investment objective is growth. The customer has an existing large portfolio of equities and fixed-income securities. However, the customer is now seeking additional diversification into real estate, but wants some liquidity. What recommendation should be made to this customer?
An equity REIT that trades on the NYSE
An unlisted equity REIT
The common stock of a home builder
A DPP which invests in new construction of residential housing
An equity REIT that trades on the NYSE
Both DPPs and REITs provide this type of diversification; however, investing in the stock of a home builder does not. It’s important to notice that the customer requires liquidity. When comparing REITs to DPPs, most REITs are exchange-traded and provide liquidity, while DPPs are not exchange-listed and often have multi-year holding periods. The unlisted REIT may not offer the customer the liquidity he’s seeking.
A recent law school graduate is hired by a large firm that provides a match to any employees who contribute to its 401(k) plan. The client wants to allocate 7% of his salary to a retirement plan. The graduates’ registered representative (RR) should recommend:
Opening a Roth IRA
Contributing to the firm’s 401(k) plan
Contributing to the firm’s 401(k) plan and purchasing a variable annuity
Opening a traditional IRA
Contributing to the firm’s 401(k) plan
Since the firm offers a match for its 401(k) plan, the recent graduate should first contribute the maximum amount possible to this plan. Without additional information, there’s no need for this client to add the purchase of a variable annuity.
Regarding a head-and-shoulders chart pattern, a technical analyst believes that:
It signifies that a trend is reversing
A bottom formation is bearish
A top formation is bullish
It signifies that a trend is continuing
It signifies that a trend is reversing
A head-and-shoulders formation indicates the reversal of a trend. A head-and-shoulders top formation is bearish because it indicates the reversal of an upward trend. A head-and-shoulders bottom formation (inverted head and shoulders) is bullish since it indicates the reversal of a downward trend.
A portfolio has a beta of 1.0 and a return of 8% over a specific period. If the S&P 500 Index has a return of 6% over that same period, this portfolio has which of the following?
Positive alpha
Negative alpha
No alpha
Positive beta
Positive alpha
While a stock’s beta measures its performance related to the overall market, alpha measures the portion of a stock’s return that’s achieved independent of the market. Alpha is influenced by factors that are unique to the company and its industry group. Outperforming the benchmark results in a positive alpha; however, underperforming the benchmark results in a negative alpha. In this question, since the portfolio has a beta of 1.0, then its expected return is 6%. This is because a portfolio or other asset with a beta that’s equal to the beta of the market (i.e., the S&P 500 Index) will have a return that’s equal to the market. However, since the portfolio’s return of 8% exceeds the market’s return of 6%, the portfolio has a positive alpha of 2%.
