Investment quizzes

An investor wants to immunize his/her bond portfolio. Immunization will lower which of the following? A. Interest rate risk B. Purchasing power risk C. Principal risk D. Liquidity risk E. Market risk

Question 1 Investment Planning : A Duration is used to compare interest rate risk between bonds with different maturities and coupons. It can be used to immunize a bond from loss of principal due to interest rate changes.

A portfolio that is positioned outside (above) the efficient frontier is: A. Unattainable B. Attainable C. Inefficient D. Optimal

Question 1 Investment Planning : A Unattainable/not feasible

What happens when the yield curve is invented? A. Long-term rates go down B. Short-term rates go down C. All interest rates go up D. Inflation is decreasing

Question 1 Investment Planning : C Both long-term and short-term rates go up. Short-term go up more than long-term but the whole curve moves up because inflation is increasing.

XYZ Company's stock closed yesterday with the following data: Closing Price $50 Dividend $2 Earnings Per Share $3 Trading Range $50 - $52 What is the stock's yield? A. 4.0% B. 6.0% C. 66.7% D. 5.8% E. 3.8%

Question 10 Investment Planning : A $2 ÷ $50 = 4%

Company X does a 5:2 split. If the client owns 1,000 shares of company X, how many new shares will be issued? A. 1,000 B. 1,500 C. 2,500 D. 5,000

Question 10 Investment Planning : B 5/2 x 100 = 5,000/2 - 2,500 However, the client already owns 1,000. He/she will get 1,500 more.

Which of the following is not a factor to rebalancing a portfolio? A. Client is very concerned about the stock market and is 100% in money markets. B. Client is taking a new job with a significant raise. C. Client's wife is expecting a new baby in a month. D. Client's aunt died and the expected inheritance is substantial.

Question 11 Investment Planning : A There is no rebalancing in Answer A. There has to be an economic issue or life cycle change.

If the correlation (R) is .7 which performance measure would you use? A. Sharpe B. Treynor C. Jensen D. Alpha

Question 12 Investment Planning : A You must square the correlation (R) of .7 that means R2 is .49. This is below 60 and you should use Sharpe. Answers C and D are the same and cannot be correct.

Random walk hypothesis suggests which of the following? A. That technical analysts can outperform the market B. That fundamental analysts can outperform the market C. That the next price change of a stock is unrelated to past price behavior D. That security pricing reflects all known information

Question 2 Investment Planning : C If prices move randomly, technical analysis is useless. Weak form is related to, but not identical with, random walk; therefore, fundamental analysis could be an answer. Answer C is the definition of random walk, and Answer D is the definition of EMH.

Which of the following statements is true? A. The shorter the time is to maturity, the greater the potential for a bond's price fluctuation. B. Duration is directly related to coupon rate. C. Duration and maturity are positively correlated. D. Duration is directly related to yield to maturity. E. The higher the market interest rate is, the greater the relative price fluctuations of bonds.

Question 2 Investment Planning : C The other answers are incorrect.

The following defines what investment technique? This technique is "a method in which an investor first looks at trends in the general economy and next selects industries and then companies that should benefit from those trends". A. Fundamental analysis B. Technical analysis C. Top-down method D. Bottom-up method

Question 2 Investment Planning : C This defines top-down.

If Rm (the return on the market) is 10% and Rf (the risk-free rate) is 6%, then what is the stock risk premium if the security has a beta of 1.4? A. 5.6% B. 8.4% C. 10% D. 14%

Question 3 Investment Planning : A (10% - 6%) 1.4 = (.04) 1.4 = 5.6% (The formula for stock risk premium)

What is the approximate change in the price of a $1,000 bond when interest rates increase by 1.56%, the bond duration is 8 years, and the yield to maturity is 4%? A. -$113.68 B. -$120.00 C. +$113.68 D. +$120.00

Question 3 Investment Planning : B -8 {.0156 ÷ 1.04} = -8(.015) = -12% $1,000 x -12% = -$120.00

Active investment strategies include which of the following? I. Dollar cost averaging II. Mutual fund switching III. Market timing IV. Buying an index fund A. I, II, III B. II, III C. II, IV D. IV

Question 3 Investment Planning : B Dollar cost averaging and buying an index fund are passive investment strategies.

Which form of Efficient Market Hypothesis reflects all information including insider information? A. Strong Form B. Semi-strong form C. Weak form D. Strong and semi-strong forms E. All three forms

Question 4 Investment Planning : A Strong form fully reflects all information, public or private.

Which bond would be the least affected by an interest rate change? A. Short duration bond B. Long maturity bond C. Low coupon bond D. Large duration bond

Question 4 Investment Planning : A The other bonds would be affected more.

Your client buys 1,000 shares of a high-flying Internet stock at $60. The initial margin is 50%. You inform him that this stock has a 30% maintenance margin. Below what trade price do you tell him to expect both a telephone call from you and margin call? A. $18 B. $30 C. $40 D. $44 E. $42.85

Question 4 Investment Planning : E 1 - .50 x $60 = .5 x 60 = $42.85 1 - .30 .7

The Sharpe ratio does which of the following? I. Assumes the portfolio is well-diversified. II. Assumes the portfolio is not diversified. III. Compares the actual return to the expected return. IV. Standardizes performance by the portfolio's beta coefficient. A. I, III, IV B. II, III C. II D. I, II

Question 5 Investment Planning : C Answers I, III, and IV refer to the Jensen index.

Which of the following are consistent with belief in the EMH? I. An individual investor can randomly select a diversified portfolio of securities and earn a return consistent with the market as a whole. II. Once a portfolio has been selected, there is no need to change it. III. Technical analysis outperforms a buy-and-hold strategy. IV. The prices of securities do not reflect all available information. A. I, II, III B. I, II, IV C. I, II D. III, IV E. I, IV

Question 5 Investment Planning : C The prices of securities fully reflect all information. Technical analysis will not produce superior results.

Which bond would be most affected by an interest rate change? A. Short duration bond B. High coupon bond C. Short maturity bond D. Long maturity bond

Question 5 Investment Planning : D The other 3 bonds would be little affected. Notice, the question does not ask what is least affected.

Given the following data on Fund X: Realized return of Fund X 17% Realized return of market 18% Beta Fund X .72 Beta of Market 1.0 Standard deviation Fund X 9% R2 Fund X 87% If the risk-free rate is 6%, what is the alpha of the fund? A. -3.64% B. 2.36% C. 8.36% D. 13.16%

Question 6 Investment Planning : B ap =rp-[rf+(rm-rf)Bp]= 17% - [6% + (18% - 6%) .72] = 2.36 The question asked you to calculate the alpha. There is no shortcut to the calculation.

If interest rates rise, which of the following would experience the greatest percentage drop in value? A. T-bills B. Treasury notes C. Treasury bonds-30 year D. GNMAs

Question 6 Investment Planning : C The longer the maturity, the more volatile the price. The longest maturity is T-bonds.

What is Mr. Pate's required rate of return if the Rf (T-bill rate) is 4.5%, his beta is 1.0, and the Rm (market return) is 600 basis points above the T-bill rate? A. 4.5% B. 6% C. 9% D. 10.5%

Question 6 Investment Planning : D r = Rf + (Rm - Rf) B (The required rate of return) r = 4.5% + (10.5% - 4.5%) 1 =10.5% 600 basis points is 6% 6% + 4.5% = 10.5%

A client owns 10,000 shares of a stock worth $2 a share. The company declares a 10 for 1 reverse split. After the split, how many shares will the client own? A. 500 B. 1,000 C. 2,000 D. 20,000

Question 7 Investment Planning : B Before the split, 10,000 at $2 = $20,000 After the split, 1,000 at $20 = $20,000

A stock is selling for $28.50. A financial analyst determines that the proper P/E ratio is 50 and that the firm will earn $.50. The stock pays no dividend. A. The stock is undervalued. B. The stock is overvalued.

Question 7 Investment Planning : B Current market price = $.50 x 50 =$25. At $28.50 per share, the stock is overvalued.

Bart is an investor who follows a buy-hold strategy. Each quarter he reviews his portfolio by focusing on each stock's quarterly financial statements. Occasionally he repositions his portfolio based on this research. He is using which approach? A. Anomalies B. Markowitz C. Weak from EMH D. Technical analysis

Question 7 Investment Planning : C He is using fundamental analysis. Weak form says fundamental analysis may produce superior results.

Which of the following is not an anomaly? A. Random walk B. Value Line phenomenon C. Neglected firm effect D. P/E effect

Question 8 Investment Planning : A Random walk deals with security prices incorporating new information.

You are given the following information on a publicly-traded company: Book Value $10/share Stock outstanding 10 million shares Common dividends paid $.20/share EPS $1.90 What is the return on common equity from the data above? A. 2.1% B. 10.53% C. 19% D. 20.2%

Question 8 Investment Planning : C ROE = $1.90 = 19% $10

Financial ratios are useful for analysis using which of the following? A. A single ratio across different industries over time B. A single ratio within the same industry over time C. Several ratios across different industries over time D. Several ratios with the same industry over time

Question 8 Investment Planning : D One ratio by itself means little (Answer B), but several ratios together may give a clear picture of the firm's strengths and weaknesses. Then they may be compared at a given time for several firms within the same industry.

You are given the following information on a publicly-traded company: Book value $10/share Stock outstanding 10 million shares Common dividends paid $.20/share EPS $1.90 What is the dividend payout ratio from the data above? A. 2.1% B. 10.53% C. 19% D. 20.2%

Question 9 Investment Planning : B Dividend Ratio = $.20 = 10.53% $1.90

With Regulation T at 50%, your client purchases 100 shares of XYZ at $70 per share and simultaneously purchases an XYZ May 70 put for a premium of $4. What is the minimum amout of cash the client must put up using margin? A. $3,700 B. $3,900 C. $7,000 D. $7,400

Question 9 Investment Planning : B The 100 shares of stock at $70 are marginable at 50%. Options are not marginable securities. The full amount of the option cost must be paid in cash. 50% of $7,000 plus the put premium of $400 is $3,900.