Series 65 Unit 10

The statistical measurement that indicates how much an investment's returns have fluctuated compared with its average return over a period of time is known as A) standard deviation B) beta C) duration D) Sharpe ratio

A.

Which of the following statements best represents a bond's present value? A) Present value is the sum of all the discounted future payments. B) Present value is the sum of all the discounted future interest payments. C) Present value represents the internal rate of return (IRR) of the bond. D) Present value is the discounted future repayment of principal.

A.

When analyzing a security's standard deviation, which of the following statements accurately describes observations according to a normal frequency distribution curve? A) Approximately 97.5% of all observations will be within two standard deviations on either side of the mean. B) Approximately two-thirds, or 68%, of observations will be within one standard deviation on either side of the mean. C) Approximately 97.5% of all observations will be within three standard deviations of the mean. D) Approximately 95.5% of all observations will be within three standard deviations of the mean.

B.

A company's current ratio is 0.5:1. This could be an indication A) the company's current assets are twice its current liabilities. B) the company may have trouble paying its bills. C) the company is highly leveraged. D) the company's working capital is sufficient to meet daily needs.

B. The formula for current ratio is the current assets divided by the current liabilities. A 0.5:1 ratio means that the company has current liabilities that are twice its current assets. This would also mean a negative working capital (current assets minus current liabilities) and would probably mean that the company is going to have a difficult time paying its bills.

An IAR is viewing the balance sheet of a corporation. Included in the computation of the company's working capital are all of the following EXCEPT A) cash B) convertible bonds it has issued C) accounts receivable D) marketable securities of other companies

B. The working capital of a corporation is equal to its current assets minus its current liabilities (a current liability is payable within 12 months). Because all bonds, convertible or not, issued by the corporation are long-term liabilities, they are not included in the working capital computation. Accounts receivable, marketable securities, and cash are short-term assets included in the calculation of working capital.

Your client has $10,000 to invest today and expects to earn an after-tax return of 8% to send his daughter to college in 12 years. Which of the following is needed to determine whether the investment is likely to satisfy the client's goal? A) Client's marginal federal income tax bracket B) Expected cost of college C) Consumer Price Index D) Present value

B. To determine whether the investment will satisfy the goal, the investment adviser representative needs to know the amount needed to pay for college. The information we have here will allow us to compute the future value: $25,181.70. This may not be enough to pay for even 1 year of college 12 years from now.

If an investment can be expected to return 8%, using the rule of 72, what is the present value needed to have $50,000 for a child's education in 18 years? A) $6,250 B) $12,500 C) $25,000 D) $2,777

B. Under the rule of 72, dividing 72 by the expected return shows the number of years it will take for a deposited sum to double. 72 divided by 8 equals 9 years. Over an 18-year period, there will be 2 doublings. So, dividing the future value ($50,000) by 4 solves for the present value required.

An investment of $2,000 made 10 years ago is now worth $8,000. Using the Rule of 72, the approximate compounded annual rate of return is A) 40% B) 14.4% C) 7.2% D) 25%

B. This investment has quadrupled in 10 years. Using the Rule of 72, we know how to compute the rate of return when an investment doubles. This one has doubled every 5 years. Dividing 72 by 5 years gives us an approximate rate of 14.4%.

When a bond's NPV is zero, it is usually an indication that A) the bond is highly rated. B) the bond is a zero-coupon bond. C) the market is highly efficient. D) the bond is mispriced.

C. An NPV of zero indicates that there is no difference between the bond's present value and its current market price. That usually indicates a highly efficient market.

The following numbers (in %) represent the returns from an investment fund over the past seven years: 2014: 13%, 2015: 11%, 2016: 2%, 2017: 6%, 2018: 5%, 2019: 8%, 2020: 6%. Using the range measure would indicate that the seven-year returns from the fund had a range of A) 2%. B) 9%. C) 11%. D) 4%.

C. Using the range measure would indicate that the seven-year returns from the fund had a range of 11 = (13 - 2). This is simply the difference between the highest and lowest returns.

The time value of money is part of the computation for A) the after-tax return B) the risk-adjusted return C) the real rate of return D) the internal rate of return

D.

Which of the following statements is correct? A) Portfolio managers have a goal of reaching zero alpha. B) Beta is a measure of relative unsystematic risk for stock or portfolio returns. C) A stock or portfolio's beta increases as its alpha declines. D) Beta is a measure of relative systematic risk for stock or portfolio returns.

D.

When constructing a portfolio, one of the goals is to increase diversification. Which of the following pairs offers the most diversification? A) Corporate debentures/convertible bonds B) Municipal GO bonds and long-term U.S. Treasury bonds C) Large-cap stock/blue-chip stock D) U.S. equity securities and foreign equity securities

D. Diversification is generally accomplished by adding securities that don't have a high degree of correlation.

Using the net present value method, a potential investment should be undertaken if the present value of all cash inflows minus the present value of all cash outflows (which equals the net present value) is A) less than zero B) equal to zero C) positively correlated D) greater than zero

D. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a proposed investment is positive, it should be accepted. However, if NPV is negative, the investment should probably be rejected because cash flows will also be negative.

You have determined that the net present value (NPV) of your client's investment is positive. If your client's required rate of return is 8%, which of the following is most likely the investment's internal rate of return (IRR)? A) 8% B) 4% C) 0% D) 9%

D. If the NPV is a positive number, the investment's IRR must be greater than the investor's required rate of return. In this question, the required rate of return is 8% so the IRR (actual return) must be higher than that. There is only one choice higher than 8%. Remember, when the NPV is positive, it is a good investment.

If a company successfully gets the owners of its long-term bond issue paying 7% annual interest to exchange them on a dollar-for-dollar basis with the company's preferred stock paying a 7% annual dividend, what is the effect on EPS? A) Increase B) Not enough information C) Decrease D) No effect

The 7% interest payment is moved from a pre-tax deduction to an after-tax dividend payment. This increases the amount of taxable income, thereby increasing the company's tax liability. The 7% payment remains the same. With an increased tax burden and everything else remaining the same, the EPS will decrease.