Series 65 Unit 20

Cecil has a discretionarily-managed account with Pelf Reliable Advisors (PRA), an investment adviser registered in States C, D, and G. Over the past year, the portfolio produced a 12% return with a beta of 1.05. The risk-free rate is 3.5%, and the overall market returned 10.85%. Based on this information, calculate alpha and determine if PRA added any value to the portfolio.

Alpha = 0.78%; the adviser outperformed the market by 0.78%

If a company with 10 million shares outstanding with total earnings of $50 million pays a $2 dividend, the dividend payout ratio is

40%

Over the past 5 years, a stock has had returns of +16%, + 5%, −4%, +12% and +8%. This results in an arithmetic mean of

7.4%

A client's bond portfolio consists of 5 Treasury issues in equal amounts. Their durations are: 4, 5, 7, 9, and 15 years. What is the average duration of the portfolio?

8 years

Over the past five years, a stock has had returns of +16%, +5%, -4%, +12% and +8%. The median of the returns is

8.0%

When the market interest rate is 8%, which of the following equally-rated bonds will have the potential for the greatest relative price volatility to changes in interest rates? A) 12% coupon bond with 12 years to maturity B) 8% coupon bond with 12 years to maturity C) 8% coupon bond with 6 years to maturity D) 12% coupon bond with 6 years to maturity

B) 8% coupon bond with 12 years to maturity

Which of the following municipal bonds would be most subject to interest rate risk? A) 7s '28 on a 7½% basis B) 8s '40 on a 7.8% basis C) 7.5s '29 on a 7.2% basis D) 7.8s '35 on a 7.4% basis

B) 8s '40 on a 7.8% basis

Which of the following measures the variability of an asset's returns over time? A) Standard deviation B) Beta C) Time-weighted return D) Alpha

A) Standard deviation

Current market interest rates are 6%. A bond with an 8% coupon would be most likely to have a net present value of zero when the bond is A) selling at par. B) selling at a premium. C) called for redemption. D) selling at a discount.

B) selling at a premium.

One popular method of determining the value of certain securities is discounted cash flow (DCF). Using the DCF with the current discount rate at 3%, which of the following would be expected to have the highest market value? A) XYZ Corporation mortgage bond maturing in 10 years with a coupon of 4.5% B) U.S. Treasury bond maturing in 20 years with a 4% coupon C) ABC Corporation debenture maturing in 25 years with a 5% coupon D) Bay Area Rapid Transit Authority 4% revenue bond maturing in 15 years

C) ABC Corporation debenture maturing in 25 years with a 5% coupon

To make a quantitative evaluation using the present value computation, which of the following is not needed? A) Account value at the end of the period B) Anticipated rate of return of the portfolio C) Account value at the beginning of the period D) Time period involved

C) Account value at the beginning of the period

Your client owns a 91-day T-bill, a 2-year T-note, a 20-year T-bond, and a 20-year STRIP. The market price of which of these is likely to have the smallest movement when there are changes to the discount rate? A) T-note B) T-bond C) T-bill D) STRIP

C) T-bill

An investor is looking to add some bonds to her portfolio. One of the bonds she is analyzing has a 3% coupon and the other a 6% coupon. Assuming both bonds have the same maturity date, a change in interest rates will have a more profound effect upon the market price of which bond? A) Changes in interest rates affect both bonds equally B) The 6% coupon C) The 3% coupon D) The bond with the lower rating

C) The 3% coupon

Which of the following bonds is most likely to exhibit the greatest volatility due to interest rate changes? A bond with A) a high coupon and a long maturity. B) a high coupon and a short maturity. C) a low coupon and a long maturity. D) a low coupon and a short maturity.

C) a low coupon and a long maturity.

All of the following ratios are measures of the liquidity of a corporation except A) quick ratio. B) acid test ratio. C) debt-to-equity ratio. D) current ratio.

C) debt-to-equity ratio.

While searching for a suitable investment for your client, you narrow the choice to the following four companies: Company A with returns over the past 4 years of 12%, 4%, 8%, and 6% Company B with returns over the past 4 years of 7%, 8%, 9%, and 6% Company C with returns over the past 4 years of 10%, 12%, -2%, and 10% Company D with returns over the past 4 years of 15%, 20%, -8%, and 3% Which of these choices has the highest standard deviation?

Company D

Which of the following correlations would represent two assets that tend to move in tandem with one another? A) −0.68 B) −0.11 C) +0.16 D) +0.81

D) +0.81

Two securities with which of the following correlation coefficients could be combined to create a theoretically risk-free portfolio? A) +1.0 B) -0.5 C) 0.0 D) -1.0

D) -1.0 In theory, risk elimination can be achieved if two securities with a perfect negative correlation are combined. That is, when one goes up, the other goes down by the same amount. In other words, one is the antipode of the other.

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 95.5% of all observations will be within three standard deviations of the mean. C) Approximately 97.5% of all observations will be within three standard deviations of the mean. D) Approximately two-thirds, or 68%, of observations will be within one standard deviation on either side of the mean.

D) Approximately two-thirds, or 68%, of observations will be within one standard deviation on either side of the mean.

Which of the following statements regarding the time value of money is not correct? A) Future value is the future amount to which a sum of money today will increase on the basis of a defined interest rate and period. B) Compound interest is interest earned on interest. C) Future value of an ordinary annuity is the future amount to which a series of deposits of equal size will increase. D) Compound interest is interest earned on the initial investment.

D) Compound interest is interest earned on the initial investment.

Which of the following incorrectly states the relationship between NPV, IRR, and required return? A) If NPV > 0, then IRR > required return. B) If NPV = 0, then IRR = required return. C) If NPV < 0, then IRR < required return. D) If NPV > 0, then IRR < required return.

D) If NPV > 0, then IRR < required return.

An investor reviewing the performance of a security reads that its returns for the past nine years are +9%, -4%, +13%, +6%, +2%, -8%, +11%, +2%, +5%. Using this information, which of the following is not a correct statement? A) The median is 5%. B) The mode is 2%. C) The mean is 4%. D) The range is 11%.

D) The range is 11%.

Which of the following securities has an easily determinable internal rate of return? A) 7% corporate bond B) 5% municipal bond C) m6% Ginnie Mae D) Zero-coupon bond

D) Zero-coupon bond

Of the following bonds, which has the greatest price volatility? A) Zero-coupon bond with 5 years to maturity B) Corporate bond fund C) AA corporate bond with 7 years to maturity D) Zero-coupon bond with 15 years to maturity

D) Zero-coupon bond with 15 years to maturity

Which ranking lists the following bonds in order from shortest to longest duration? I. ABC 8s of 2050 II. DEF 9s of 2051 III. GHI 5s of 2049 IV. JKL zeros of 2050

II, I, III, IV

The price of which of the following will fluctuate most with fluctuating interest rates?

Long-term bonds

Your client has the following bonds in her portfolio: XYZ 3s of 44. TUV 6s of 45. QRS 9s of 43. NOP 12s of 42. If interest rates were to suddenly rise, which of her bonds would suffer the greatest decline in market price?

XYZ 3s of 44

The measurement of a portfolio's actual or realized return in excess of (or deficient to) the expected return calculated by the capital asset pricing model (CAPM) is known as

alpha

If a bond has a long duration, it will

be more sensitive to small changes in interest rates than a bond with a shorter duration

A portfolio manager who is successful at market timing will

increase the beta of the portfolio in advance of a rising market.

The main difference between the current ratio and the quick ratio is that the quick ratio excludes

inventory.

The best time for an investor seeking returns to purchase long-term, fixed interest rate bonds is when

long-term interest rates are high and beginning to decline

In a group of returns, the central value of observations arranged in order from lowest to highest is known as the

median.

Knowing the average maturities would be most important when doing a cash flow analysis on

mortgage-backed securities

If a stock has a beta of less than 1.0, the stock's price will

not increase as much as the market when the market is up

If the required rate of return is less than anticipated in a present value calculation, the effect would be that the

present value would be higher.

The Smiths are saving money for a down payment on a house. The Smiths have $25,000 in cash, and they estimate that in 5 years they will have approximately $31,000 if they deposit their cash in a savings account that compounds interest yearly. To calculate the $31,000 amount, the Smiths determined

the future value of the $25,000

The difference between present value and net present value represents

the initial cash outlay

The discount rate that makes the NPV of all cash flows from a security equal to zero is

the internal rate of return.

A securities analyst reviewing a corporation's financial statements notes that the enterprise has total current assets of $10 million, inventory of $4 million, cash on hand of $2 million, total current liabilities of $8 million, and net income of $15 million. The company's acid test ratio is closest to

0.75 to 1.00.

Use the following chart to answer this question: STOCK 50% 30% 10% 0% BONDS 50% 70% 90% 100% High return 39.4% 37.2% 34.3% 32.7% Low return 1.4% 6.5% 7.2% 8.5% Ave. return 15.8% 16.2% 15.5% 15.2% Std. Dev. 11.25 10.75 10.15 10.34 Which portfolio mix would you recommend to a client who is most concerned about projected near-term volatility?

10%/90%

Fundamental analysts give significant credence to financial ratios. Which of the following tends to give an indication of the profitability of the enterprise? A) Sales-to-earnings ratio B) Debt-to-equity ratio C) Current ratio D) Price-to-earnings ratio

A) Sales-to-earnings ratio

An analyst viewing a corporate income statement will be able to review all of the following except A) current ratio. B) operating expenses. C) net sales or net revenues. D) pre-tax income.

A) current ratio.

A portfolio manager considers adding an asset to the portfolio. The manager decides between 4 equally-risky assets: W, X, Y, and Z. The correlations of each asset with the portfolio are: Asset W +0.90 Asset X +0.80 Asset Y +0.40 Asset Z +0.20 To achieve the optimal diversification benefits, which of the assets should be selected by the manager?

Asset Z Correlation runs from + 1.0 to - 1.0. A the higher the correlation, the more the securities move in tandem. That lessens the diversification. The reverse is true when the correlation is low or negative. Asset Z has the lowest correlation with the portfolio and will therefore provide the largest reduction in portfolio risk. Even better diversification would be obtained if there was a choice with a negative correlation.

One of your clients owns 2 different 6% corporate bonds maturing in 15 years. The first bond is callable in 5 years, while the second has 10 years of call protection. If interest rates begin to fall, which bond is likely to show a greater change in price? A) Both will decrease by the same amount B) Bond with the 10-year call C) Both will increase by the same amount D) Bond with the 5-year call

B) Bond with the 10-year call

Which of the following statements regarding the time value of money is not correct? A) Future value is the future amount to which a sum of money today will increase on the basis of a defined interest rate and period. B) Compound interest is interest earned on the initial investment. C) Compound interest is interest earned on interest. D) Future value of an ordinary annuity is the future amount to which a series of deposits of equal size will increase.

B) Compound interest is interest earned on the initial investment.

While searching for a suitable investment for your client, you narrow the choice to the following four companies: Company A with returns over the past four years of 12%, 4%, 8%, 6% Company B with returns over the past four years of 7%, 8%, 9%, 6% Company C with returns over the past four years of 10%, 12%, -2%, 10% Company D with returns over the past four years of 15%, 20%, -8%, 3% Which of these choices has the highest volatility?

Company D

If an analyst wished to determine the degree to which leverage was being employed by a subject company, she would most likely examine that issuer's

debt-to-equity ratio

Managers of bond portfolios who anticipate an increase in interest rates should

decrease the portfolio duration

What happens to bond durations when coupon rates increase and maturities increase? As coupon rates As maturities increase, duration: increase, duration:

decrease, increase

If the coupon rate on a bond increases, the duration of the bond will

decrease.

A portfolio manager with a growth style would probably diversify by

devoting a portion of the portfolio to securities with a negative correlation.

An analyst wishes to assess the value of a fixed-income security by taking the income payments scheduled to be received over a given future period and adjusting that for the time value of money. This analytical tool is known as

discounted cash flow. The discounted cash flow (DCF) for a fixed-income security (bond) is the sum of the expected interest payments that has been adjusted to reflect the time value of money. With all other things being equal, the bond with the higher DCF is the better investment.

Under the net present value (NPV) method of evaluating investments, an investment is attractive if the net present value of the expected returns is

greater than zero.

According to most fundamental analysts, examining a company's price-to-earnings ratio gives an indication of

how much investors value the stock as a function of the company's market price to its earnings.

Portfolio A has a beta of 1.0 and has returned 8% over the past year. Portfolio B has a beta of 1.5 and, over that same period, has returned 16%. Based on this information, an analyst would conclude that portfolio B has

positive alpha.

Some analysts use the discounted cash flow (DCF) to determine the theoretical value of a debt security. Under DCF, the bond price can be summarized as the sum of the

present value of the par value repaid at maturity plus the present value of the coupon payments.

Investment risk may broadly be categorized as either unsystematic or systematic risk; both types of risk together constitute total, or absolute, risk. Total risk is measured by

standard deviation

The following numbers (in %) represent the returns from an investment fund over the past seven years: 2016: 13%, 2017: 11%, 2018: 2%, 2019: 6%, 2020: 5%, 2021: 8%, 2022: 6%. Using the range measure would indicate that the seven-year returns from the fund had a range of

11%.

XYZ Corporation has a beta of 1, and ABC has a beta of 1.4. XYZ has returned 12% and ABC 18.8%. Based on this information ABC had alpha of

2%

Moonglow Specialties, Inc., is paying a quarterly dividend per share of $0.05. Based on a current share price of $10, the dividend yield is closest to

2.00%.

Which of the following statements is most accurate regarding the net present value (NPV) and internal rate of return (IRR) on a bond? A) IRR assumes the cash flows are reinvested at market interest rates. B) NPV assumes the cash flows can be reinvested at market interest rates. C) NPV assumes that cash flows can be reinvested at the bond's IRR. D) IRR assumes the cash flows are reinvested annually.

B) NPV assumes the cash flows can be reinvested at market interest rates.

Which of the following is most commonly used to evaluate the marketplace's perceived value of a particular stock? A) Earnings per share B) Price-to-earnings ratio C) Dividend payout ratio D) Margin of profit

B) Price-to-earnings ratio

Fundamental analysts give significant credence to financial ratios. Which of the following tends to give an indication of the profitability of the enterprise? A) Debt-to-equity ratio B) Sales-to-earnings ratio C) Price-to-earnings ratio D) Current ratio

B) Sales-to-earnings ratio

A client who wishes to have $50,000 available to help fund a 3-year-old child's college education in 15 years estimates that if the portfolio can earn 7%, a deposit of $18,122.30 will be required today. This deposit is referred to as

the present value

If the required rate of return is higher than anticipated in a present value calculation, the effect would be that

the present value would be lower

A financial ratio used by some analysts to help determine if a company's stock is over or undervalued is

the price-to-book-value ratio.

A security that your client has been following has a historical average annual return of 11% and a standard deviation of 6%. Knowing this, it would be expected that 95% of the time, your client could expect a return within the range of

−1% and +23%

Which of the following is a stock valuation ratio? A) Operating profits to net sales B) Dividend payout ratio C) Price-earnings D) Revenues to assets

C) Price-earnings

Present value is a computation frequently used to determine the amount of deposit needed now to meet a future need, such as a college education. If an investor uses an expected return of 8%, but the actual return over the period is 6%,

the present value was insufficient to meet the objective