Chapter 15 - Portfolio and Market Analysis

head and shoulders top is a _____________ indicator

bearish

measures the volatility of an asset relative to the entire market

beta

head and shoulders bottom is a ___________ indicator

bullish

Which of the following choices gives the best indication of current interest rates on revenue bonds? a. Visible supply b. Placement ratio c. List of 20 bonds d. List of bonds with 30-year maturities

d (The Bond Buyer computes the Revenue Bond Index which is the average yield of 25 revenue bonds with 30-year maturities.)

an asset pricing model that describes the relationship between expected risk and expected return for a portfolio

efficient risk return frontier

outperforming the benchmark results in a _______________ alpha

positive

gauges investors sentiment in the market. a rising ratio indicates a bearish mood

put/call ratio

the rate on long term treasury bonds

risk free rate

the market return in excess of risk free rate

risk premium

the __________________ is focused on small cap stocks

russell 2,000

in order to profit from a breakout, one could enter sell stop orders ___________ a ______________ level

sell, below

the number of shares that have been sold short, but not yet covered

short interest

short interest and trading volume are ______________ indicators

technical

an indicator of the support behind a move in the direction of stock prices

trading volume

straight lines in technical analysis that show direction of speed and price movements

trend lines

largest index

wilshire (5,000 stocks)

A fundamental analyst is NOT interested in which TWO of the following metrics? i. Short interest ii. The P/E ratio iii. Trading volume iv. EPS a. I and III b. I and IV c. II and III d. II and IV

a

Paul and Mary Smith have discussed various portfolio allocations with their adviser Chuck. He has considered the Smiths' risk tolerance and expected return in order to recommend an efficient portfolio, that is, one in which the portfolio offers the: a. Highest expected return for the lowest level of risk b. Average of expected returns for the lowest level of risk c. Lowest of expected returns based on its Beta for the least amount of investment d. Greatest return based on the average Beta of each stock in relation to the total return

a

When a stock is at its resistance price, a technical analyst will most likely say that it is: a. Overbought b. Oversold c. Inverted d. Upward sloping

a

Which of the following descriptions regarding the Capital Asset Pricing Model (CAPM) is NOT TRUE? a. It predicts future values for the stock b. It was developed to explain the behavior of security prices c. It provides a mechanism to assess risk and return d. It is based on the efficient market theory and assumes investors act rationally

a

According to technical analysis, a head and shoulders top formation indicates a trend that is: a. Bearish b. Bullish c. Neutral d. Highly unpredictable

a (A head and shoulders chart formation is one of the classical patterns agreed upon by technical analysts or chartists as being a reversal of a trend in the price of a stock. If the head and shoulders pattern appears at the top of an upward trend (head and shoulders top), as in this example, it indicates the reversal of an upward trend (bearish indicator). If the head and shoulders pattern appeared at the bottom of a downward trend (head and shoulders bottom), it indicates a reversal of a downward trend in the price movement of a particular stock (bullish indicator).)

Changes in an investor's profile should be updated: a. At the time the change occurs. b. Monthly c. Semi-annually d. Annually

a (An investor's profile should be updated at the time a change occurs. All recommendations must be based on information that is current to the investor's situation.)

When an investor compares her portfolio's performance to an average or index, the average or index is considered a(n): a. Benchmark b. Total return c. Return of capital d. Unrealized gain

a (Investors often compare the performance of their portfolio to a given benchmark. The benchmark could be an average or index that monitors the performance of a group of securities.)

The Bond Buyer Municipal Bond Index is based on: a. 40-Bond Index b. Noncallable long-term bonds c. A cross section of zero-coupon bonds d. Diversified bonds with approximately 40 years to maturity

a (The Bond Buyer Municipal Bond Index represents the average of the prices of 40 long-term municipal bonds adjusted to a yield of 6%.)

If an investor is bearish on small-cap stocks, which of the following products should be avoided? a. Russell Index ETFs b. MSCI Emerging Market Index ETFs c. Diamonds d. REITs

a (The Russell Index is a benchmark for small-cap stocks. All of the other answer choices track something other than small-cap equities. MSCI Emerging Market Index ETFs track securities that are listed on foreign securities exchanges of emerging markets. Diamonds are ETFs that mirror the DJIA (i.e., large-cap equities). REITs primarily invest in real estate holdings.)

Which of the following statements about technical analysis is TRUE? a. The advance-decline index is a good indicator of the strength of a bull or bear market b. The odd-lot theory states that the small investor is usually right c. It is bullish when volume is heavy in a declining market and bearish when volume is light in an advancing market d. A small short interest tends to make for a technically strong market

a (The advance-decline index is a measurement of advancing stocks versus declining stocks over a specified period. It is a good indicator of the strength of a bull or bear market. The other technical analysis theories are just the opposite of how they should be stated.)

Which TWO of the following statements are TRUE concerning chart patterns? i. The support level of a stock is the bottom of its trading range ii. A breakout above a resistance level of a stock is a bearish indicator iii. Once a trendline has been established, the price movement of a stock will usually follow the trendline iv. Once a trendline has been established, the price movement of a stock will usually move away from the trendline a. I and III b. I and IV c. II and III d. II and IV

a (The support level of a stock is the bottom of its trading range. At this price, investors are attracted to the stock, purchase the security, and support the price. The resistance level is the top of its trading range. At this level, the market price of the security meets resistance since investors feel the stock is overvalued. A breakout above a resistance level of a stock is a bullish indicator. A trendline is a solid line that traces the lows of a stock as it moves in an upward direction, and the highs of a stock as it moves in a downward direction. Once a trendline has been established, the price movement of a stock will usually follow the trendline.)

in order to profit from a breakout, one could enter buy stop orders ____________ a ______________ level

above, resistance

measures an investment's risk adjusted performance against a benchmark index

alpha

Which of the following indicators is bullish? a. A breakout below a support level b. The bottom of a saucer pattern c. The top of an inverse saucer pattern d. A decrease in the amount of short interest

b (A saucer is a chart pattern used by technical analysts that indicates that a stock has formed a bottom in its trading cycle and is ready to rise. The bottom of the saucer pattern is a bullish indicator for the stock. The reverse of the saucer pattern is the inverse saucer, where the stock forms a top in its pattern and is expected to fall. Following the logic used in the saucer, this is a bearish indicator. A breakout below the support level is a bearish signal. The term short interest refers to the amount of a company's shares of common stock that have been sold short and have not yet been covered (closed out). An increase (not decrease) in short interest has historically been considered a bullish indicator by a technical analyst.)

If a portfolio manager is rebalancing a client's assets on a quarterly basis, this would be considered: a. Too aggressive b. A strategic asset allocation strategy c. A tactical asset allocation strategy d. Churning

b (A strategic asset allocation strategy may include the periodic rebalancing of the portfolio on a monthly, quarterly or annual basis in order to keep the original asset allocation intact. A tactical asset allocation strategy is more dynamic and attempts to exploit inefficiencies in the markets by rebalancing the portfolio frequently in response to changes in economic and market conditions.)

If a technical analyst looked at a chart of a stock to identify the support level, he would look for the point at which the stock: a. Stopped increasing b. Stopped decreasing c. Remained relatively stable d. Reached a new high

b (A support level is found at the bottom of a trading range, where buyers came into the market to buy the stock and thereby support its price. It is at this point that the stock stopped decreasing.)

Which of the following choices represent logical strategies for a technical analyst? Buy calls when a stock breaks through a resistance level Buy calls when a stock breaks through a support level Buy puts when a stock breaks through a resistance level Buy puts when a stock breaks through a support level a. I and III b. I and IV c. II and III d. II and IV

b (A technical analyst believes that if a stock's price breaks through a resistance level, it will continue to rise until it reaches the next resistance level. The analyst will purchase calls if the stock's price breaks through a resistance level. The analyst will buy puts if the stock's price breaks through a support level, since the analyst believes the stock's price will continue to decline until the next support level.)

Which of the following terms relates to the graph of optimal portfolios resulting from a comparison of risk and return? a. CAPM b. Efficient frontier c. Duration d. Alpha

b (According to the Modern Portfolio Theory, a graph of optimal portfolios may be created, which is referred to as an efficient frontier.)

Which of the following statements is TRUE regarding the efficient frontier? a. It is also referred to as the Security Market Line. b. It's the set of optimal portfolios that provide the highest return for a given level of risk. c. It's a graph which compares the returns of high yield bonds to those of low yield bonds. d. It's a graph which analyzes a bond's sensitivity to interest rate fluctuations.

b (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.)

The breadth of the market is indicated best by the: a. Put-call ratio b. Advance-decline figures c. Dow Jones Industrial Average d. Short interest ratio

b (Advance-decline information indicates the number of stocks that increased versus the number of stocks that decreased during a particular trading day. When used in conjunction with stock averages or indexes, the advance-decline figures will show whether a market movement has breadth (i.e., whether it is broad-based or just limited to the stocks in the index or average).)

If a mutual fund changes or adds a portfolio manager, the greatest effect would be on the fund's: a. Expense ratio b. Alpha c. Rating d. Beta

b (Alpha is a measure of an investment's performance on a risk-adjusted basis. The excess return of the investment relative to the return of the benchmark index is its alpha. Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. On the other hand, beta is a measure of the volatility of a security or a portfolio in comparison to the market as a whole. In other words, it is the tendency of an investment's return to respond to swings in the market (i.e., the S&P 500 Index). Essentially, the market has a beta of 1.0 and security and portfolio values are measured based on how they deviate from the market.)

You have noticed that a customer has recently been making larger and more frequent transactions in her account. Should this be noted on her investment profile? a. Only if the client informs you there has been a change in their financial situation. b. Yes, when a change in the client's investment pattern is noticed. c. Yes, if the pattern persists for more than 6 months. d. No, as this would not indicate a change in the client's investment profile.

b (If the pattern of a client's transactions was to change, it indicates a change in his or her financial profile. This could be noted in larger and more frequent transactions, or smaller and less frequent transactions. In either case, it should be noted in their investment profile.)

According to CAPM, all of the following choices are examples of diversifiable, nonsystematic risk, EXCEPT: a. Credit risk b. Interest-rate risk c. Business risk d. Industry risk

b (Interest-rate risk is the systematic risk for bonds just as beta measures the systematic risk for stocks. Systematic risk is market risk, which persists despite diversification.)

Which of the following statements is TRUE concerning Modern Portfolio Theory? a. Portfolio management should be based on the risk and return of individual securities b. Portfolio management should focus on diversification among different classes of assets c. Portfolio management should focus only on the best performing securities d. Portfolio management should always avoid securities with greater risk

b (Modern Portfolio Theory creates optimal portfolios based on a client's risk tolerance and investment objectives, by allocating the portfolios among various classes of securities. It does not focus on individual securities or avoid risk. Instead, it focuses on diversifying investments across a wide spectrum of securities.)

The Bond Buyer Index is based on which of the following securities? a. Treasury bonds b. Municipal bonds c. Corporate bonds d. Mortgage bonds

b (Municipal bond indices are created by The Bond Buyer. The Bond Buyer is a financial publication that specializes in the municipal market.)

If a portfolio manager is focused on keeping a client's assigned asset allocation properly balanced over the long term, she is using a: a. Tactical asset allocation strategy b. Strategic asset allocation strategy c. Risk management approach of laddering d. Rebalancing approach

b (Strategic asset allocation attempts to maintain the assigned allocation over a long period and is more passive in nature than a tactical asset allocation strategy. Portfolio rebalancing does not describe a strategy; instead, it is the adjustment of a portfolio in preparation for an investment strategy. Laddering is considered diversifying a bond portfolio by staggering the maturity dates of the bonds in an attempt to manage interest-rate risk.)

When reading a research report on an automobile company, a registered representative's use of fundamental analysis determines that the stock is a good investment. When attempting to determine the best time to execute orders to buy the stock, the registered representative could refer to: a. A chart showing the price-earnings ratio for all automobile stocks b. A chart showing a recent history of the market price of the stock c. The company's dividend payout ratio d. The research report's past earning for the company

b (The fundamental analyst will use the balance sheets and income statements of companies to determine which security to purchase but may use technical analysis (i.e., reviewing the chart pattern of the stock's market price) to assist in determining when to make a purchase (timing).)

Which of the following terms relates to the graph that is used to determine optimal portfolios resulting from a comparison of risk and return? a. The yield curve b. Efficient frontier c. Duration d. Alpha

b (The key to this question is the reference to the term graph. According to the Modern Portfolio Theory, a graph of optimal portfolios can be created on what is referred to as the efficient frontier. As for the wrong answers, the yield curve represents the plotting of a bond's yield against the length of time until its maturity. Duration measures the sensitivity of a bond's price due to small changes in interest rates. Alpha is a form of risk-adjusted return for an asset.)

A technical analyst does NOT review: a. The advance-decline theory b. The price-earnings ratio of the Dow Jones stocks c. Short interest d. The trendline theory

b (The price-earnings ratio of the Dow Jones stocks is an indicator that a fundamental analyst will examine. A technical analyst will review the advance-decline theory, short interest, and the trendline theory.)

A RR should update a client's financial condition or status: a. When there is an obvious change in the economy of the client's hometown b. When there is a change in the clients purchases or sales that might indicate a different financial situation c. When informed by a friend or relative d. Only after any meeting with the client

b (While some clients may keep the firm well informed of any changes, others may not be so forthcoming. Changes in a client's patterns of purchases and sales may indicate a different financial situation.)

rising short interest is _____________

bullish (because eventually short sellers need to cover positions and when they go into the market to buy the security it forces the stock price to rise)

An investor purchases the following bonds: State of Florida 8% bond due 2020, State of California 8 1/2% bond due 2020, State of New York Housing Finance Agency 9% Revenue bond due 2030, and Wayne County, Michigan 8 1/2% Water and Sewer Revenue bond due 2030. This portfolio offers: a. Maturity diversification b. Coupon diversification c. Geographical diversification d. Type diversification

c

An advisory client has a portfolio that consists of a diversified group of domestic securities with different maturities. Diversification protects the client from which of the following risks? i. Business risk ii. Financial risk iii. Liquidity risk iv. Market risk a. I only b. I, II, and IV only c. I, II, and III only d. I, III, and IV only

c (A diversified portfolio that focuses its investments domestically is subject to market risk. In order to reduce this systematic (market) risk, an investor must invest in assets that do not trade in the same marketplace (such as foreign markets). If the U.S. bond or stock market declines, all of the securities within that marketplace will be affected. This portfolio is protected from all of the other risks mentioned.)

A portfolio composed of five different state G.O. issues will NOT provide an investor with protection from: a. Economic downturns in specific geographical locations b. Legislative changes in different states c. Interest-rate fluctuations d. Adverse decisions by state courts

c (A diversified portfolio will provide protection from a variety of risks, but cannot protect against fluctuating interest rates. All bonds, regardless of the issuer's location, are subject to interest-rate risk.)

The advance-decline theory states that: a. A bull market exists if the Dow industrials and transportations averages make new highs b. A bear market exists if more put options have been purchased by investors than call options c. It is bullish if more stocks go up than go down during the day d. A large number of shares sold short is bullish

c (A technical indicator that measures the strength of the market by comparing the number of stocks that increase and decrease is called the advance-decline theory. It shows the general direction and breadth of a market movement on a given day.)

A portfolio's mix of investments and two potential investors are described below. 50% municipal debt 30% blue-chip common stock 10% equity mutual funds 10% money-market funds Investor A: A 45-year-old single mom who just received a $5,000,000 inheritance. Her current salary pays her living expenses and she also contributes the maximum amount to her employer's retirement plan. She is very conservative, wants to maintain the value of her portfolio as she ages, and is concerned about the tax implications of investing her inheritance. Investor B: A 65-year-old single male who receives a significant pension as well as continuing income from the residuals in a previous business relationship. He is concerned with generating too much taxable income, but is still willing to assume some risk in his portfolio. This portfolio would be considered suitable for: a. Investor A only b. Investor B only c. Both Investor A and Investor B d. Neither Investor A nor Investor B

c (Although Investor A is conservative, she should still maintain a moderate percentage of equities in her portfolio, which this mix provides. Additionally, she should be concerned about the tax implication of her investment returns after the $5,000,000 inheritance. The inclusion of municipal bonds in the portfolio provides that benefit. Investor B seems financially secure and is willing to assume some risk in his portfolio, therefore, maintaining a portion of the portfolio in equities would be suitable. The municipal bonds would also provide a source of tax-free income for him as he ages.)

An investment that outperforms the market as it goes up but underperforms the market as it goes down would have a beta: a. Equal to 1 b. Less than 1 c. Greater than 1 d. That is negative

c (Beta is a measure of a stock's or portfolio's volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If an investment has a beta of greater than 1, it will outperform the market as it goes up and underperform the market as it goes down. Negative betas are associated with stocks or portfolios that move in an opposite direction of the market.)

An investor has invested heavily in energy stocks and the S&P Index is up by 22% from the prior year. If that sector of the S&P 500 has a beta of 1.6 and the S&P 500 increased by 10%, the investor would expect an increase in her portfolio of: a. 1.6% b. 10% c. 16% d. 22%

c (Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. If the beta of a stock is greater than one, it implies a higher level of risk and volatility compared to the stock market. If the beta of the stock is less than one, it is less risky and volatile than the market. The S&P 500 is assigned a beta of +1.0. If the energy sector of the S&P 500 has a beta of 1.6, it is assumed to be more volatile than the S&P 500. An increase of 10% in the S&P 500 would translate into an increase in the energy stocks of approximately 16% (1.6 x 10%). The fact that the S&P Index is up 22% from the prior year is not relevant.)

The beta of a stock is useful when measuring: a. Legislative risk b. Credit risk c. Systematic risk d. Inflationary risk

c (Market risk (also known as systematic risk) refers to the risk that is inherent in all securities due to market volatility. While market risk cannot be eliminated by diversifying a portfolio, it can be measured by a calculation known as beta (a stock's volatility when compared to the volatility of the whole market). Stocks with a beta of more than one are more volatile than the market. Those with a beta of less than one are less volatile than the market.)

Of the following broad-based indicators, the one with the narrowest measure of the market is the: a. Standard and Poor's 500 Index b. Wilshire Associates Equity Index c. Dow Jones Composite d. New York Stock Exchange Composite Index

c (The Dow Jones Composite contains only 65 stocks. The Wilshire Associates Equity Index shows the dollar value of approximately 3,500 stocks. The S&P 500 Index contains 500 stocks. The NYSE Composite Index consists of all common stocks that are listed on the NYSE (approximately 2,400).)

The Dow Jones Industrial Average is considered an index of: a. Value stocks b. Growth stocks c. Large-capitalized stocks d. NYSE stocks only

c (The Dow Jones Industrial Average (DJIA) is considered one of the most widely quoted measurements of the U.S. equity market. The 30 stocks that comprise the Index are among the largest and most widely held companies in the U.S. The DJIA as well as the S&P 500 Index include companies that are referred to as large-cap. Most, but not all of the stocks, are listed on the NYSE.)

Of the following broad-based indexes, the one with the narrowest measure of the market is the: a. Standard and Poor's 500 Index b. The New York Stock Exchange Composite Index c. Dow Jones Industrial Average d. The Wilshire Associates Equity Index

c (The Dow Jones Industrial Average contains only 30 stocks. The Wilshire Index represents the dollar value of all the stocks and is considered the broadest of all indexes and averages. The S&P 500 Index contains 500 stocks, while the NYSE Composite Index consists of all of the common stocks that are listed on the NYSE.)

used to determine if the risk on an investment equals the risk premium in excess of the risk free return

capital asset pricing model

inverted saucer

chart formations showing that a downward trend has come to an end

saucer

chart formations showing that an upward trend has come to an end

If an investor purchases several general obligation and revenue bonds issued by the state of New York, the investor can have diversification in all of the following choices, EXCEPT: a. Purpose b. Quality c. Maturity d. Geography

d

A customer is seeking a high risk, high reward investment. Given this objective, which of the following is the MOST appropriate? a. A stock with a high dividend yield and a beta of less than 1.0 b. A stock with a low dividend yield and a beta of 1.5 c. A stock with no dividend and a beta between 1.5 and 2.0 d. A stock with no dividend and a beta of greater than 2.0

d (Beta is a measure of a stock's (or portfolio's) volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If a portfolio's beta is 1.5, this means that the portfolio's price will change 1 1/2 times as much as the market. The term high beta is usually associated with a beta of greater than 2.0 and offers a customer a high risk, high reward investment.)

Investors who subscribe to the Efficient Market theory, may invest in various indices. Which of the following indices is a small-cap benchmark? a. Nifty 50 b. NASDAQ 1000 c. DJIA d. Russell 2000

d (The Russell 2000 Index is comprised of 2,000 small- to mid-cap companies. The Nifty 50 and NASDAQ 1000 are not indices. The DJIA (Dow Jones Industrial Average) is a large-cap index that includes 30 of the largest publicly traded companies.)

Which of the following indexes is the broadest equity market indicator? a. The Nasdaq Composite Index b. The Major Market Index c. The NYSE Index d. The Wilshire Index

d (The Wilshire 5000 Equity Index consists of approximately 3,500 stocks that trade on the New York Stock Exchange and Nasdaq. The Index is referred to as the Wilshire 5,000 because, when created, it contained approximately 5,000 stocks. The Wilshire Index still is considered the broadest of all indexes and averages.)

EPS and P/E are __________________ indicators

fundamental

reversal of a downward trend

head and shoulders bottom

reversal of an upward trend

head and shoulders top

reflects investor's attitude towards the direction the underlying market may be headed

index features

if beta is ________ than 1, it is expected to outperform when the market is down

less

if beta is ________ than 1, it is expected to underperform when the market is up

less

the trading volume that sustains an increase or decrease in prices. high volume increases momentum

market momentum

overall attitude of investors as it relates to the market or specific security

market sentiment

if beta is _______ than 1, it is expected to outperform when the market is up

more

if beta is ________ than 1, it is expected to underperform when the market is down

more

provide a current direction of prices, moving random price fluctuations

moving averages

underperforming the benchmark results in a ______________ alpha

negative

used to evaluate a stock's volatility in the future

option volatility

buying has pushed the price too high and a pullback is expected

overbought

buying has pushed the price too low and a bounce is expected

oversold