Series 65 Unit 21

Which of the following is a characteristic of index investing? A) Relatively high costs B) No guarantee of matching market returns Which of the following is a characteristic of index investing? C) A portfolio that mirrors the performance of a specific market D) A chance to achieve returns that beat the market

C) A portfolio that mirrors the performance of a specific market

Published studies have shown that much of the performance of a portfolio can be attributed to which of the following factors? A) Other factors B) Market timing C) Asset allocation D) Security selection

C) Asset allocation

Which of the following is the form of portfolio management that rotates between sectors based on changes to the business cycle? A) Cyclical rotation B) Strategic portfolio management C) Segment rotation D) Tactical portfolio management

C) Segment rotation

Sector rotation would most likely be employed by an investment adviser using which of the following investment styles? A) Strategic B) Buy and hold C) Tactical D) Contrarian

C) Tactical

Based on the following information, which stock is most attractive to a value investor? A) P/E ratio of 32:1 B) Net worth per share of $13, current market price of $23 per share C) Dividend yield of 1.3% D) Book value of $22 per share, current market value of $17 per share

D) Book value of $22 per share, current market value of $17 per share

In which of the following funds would a buy-and-hold style most likely be used by the manager?

Equity index fund

Two of the major factors involved in the capital asset pricing model (CAPM) are I. interest rates II. stock risk premium III. tax rates IV. market risk premium

II and IV

Which of the following are asset classes?

REITs The general consensus is that the major classes, for purposes of an asset allocation program, are equity, debt, cash (or cash equivalents), real estate, and commodities.

In the field of securities analysis, there are many tools available. Which of the following would most likely be used by an analyst to approximate a reasonable price for a common stock?

The dividend discount model

One of your customers notices that the short interest on KAPCO common stock is high. When she asks you for an interpretation, you should tell her that this signals

a bullish outlook

A portfolio manager who follows the value style of investing would most likely purchase shares

at the low end of their price range for the past 52 weeks

Due to an escalating trade war, the portfolio manager of an equity mutual fund anticipates a negative impact on his fund's assets. To protect his investment portfolio, the fund manager would

buy S&P 500 index puts

A securities analyst who recommends allocating to industries based on changes to the business cycle would most likely be said to be

sector rotating

Under modern portfolio theory (MPT), the optimal portfolio has

the most return for a given amount of risk

If the risk-free rate of return is 3.5%, the expected market return is 9.5%, and the beta of a stock is 1.3, what is the required return on the stock according to the capital asset pricing model?

11.30%

Which of the following bond strategies is the least active? A) Bullet B) Barbell C) Yield curve D) Ladder

A) Bullet

Which of the following portfolio management styles would most likely incur the highest transaction costs? A) Tactical asset allocation B) Indexing C) Strategic asset allocation D) Buy and hold

A) Tactical asset allocation

One popular method used to predict the expected return of a stock is the capital asset pricing model (CAPM). Analysts using CAPM rely on all of these except A) the standard deviation of the stock. B) the beta coefficient of the stock. C) the expected return on the market. D) the risk-free rate available in the market.

A) the standard deviation of the stock.

Which of the following investment styles would be most suitable for a long-term investor who seeks capital growth but is concerned about execution costs? A) International B) Buy/hold C) Growth style D) Market timing

B) Buy/hold

Lower maintenance costs would be least likely to be found when using which of the following management styles? A) Buy and hold. B) Rebalancing. C) Strategic. D) Tactical.

D) Tactical.

If the current risk-free rate is 4%, and the expected return from the market is 10%, what return should we expect from a security that has a beta of .9?

9.4%

Ian is a technical analyst who believes the market, as represented by the S&P 500 Index, is overbought. Over the next several months, there is a 12% correction. Which of the following strategies would have been successful for Ian? A) Sell futures contracts on the S&P 500 Index B) Buy call options on the S&P 500 Index C) Sell put options on the S&P 500 Index D) Buy futures contracts on the S&P 500 Index

A) Sell futures contracts on the S&P 500 Index

A technical analyst is least likely to consider which of the following when selecting securities? A) Trend lines B) Corporate earnings C) Short interest ratio D) Advance/decline line

B) Corporate earnings

An investor has $50,000 to invest in bonds. Currently, 10-year bonds are offering very attractive yields, but the client is concerned that in a few years, rates will be even higher. What would you suggest?

Barbell strategy

One of the most significant risks taken by bond investors is interest rate risk. All of these steps could be used to mitigate the effects of this risk except A) laddering the portfolio B) buying bonds with short-term maturities C) buying bonds of highest quality D) holding bonds to maturity

C) buying bonds of highest quality

The semi-strong form of efficient market hypothesis (EMH) asserts that

all public information is already reflected in security prices making fundamental analysis valueless.

The dividend discount model is

an analytical tool used to value a common stock using the present value of future dividends.

An investor who buys a stock and wishes to limit the potential downside risk should

buy a put

The type of analysis that attempts to value securities by examining general economic trends and the growth potential and productivity of individual companies is

fundamental analysis

An investment adviser representative is discussing various investment strategies with a prospective client. When discussing the "buy and hold" strategy, it would be correct to state that a characteristic of this strategy is it

has low expenses.

An optimal portfolio is one that

lies on the efficient frontier.

Corpulent Asset Services of Hamburg (CASH), a covered investment adviser, has a philosophy of placing most of their clients' assets into broad market index funds and ETFs. This would indicate that CASH's portfolio management style is most likely

passive

The semi-strong form of the efficient market hypothesis (EMH) is most accurately described as asserting that security prices fully reflect all

publicly available information.

A portfolio manager who routinely shifts portfolio assets to take advantage of the business cycle is said to be engaging in

sector rotation

An individual who is a proponent of the efficient market hypothesis (EMH) will likely invest in which of the following? A) Growth mutual funds B) Balanced mutual fund C) Sector mutual funds D) Index funds

D) Index funds

An investment adviser (IA) explaining modern portfolio theory (MPT) to a client might make all of the following statements except A) if two securities offer the same risk, choose the one with the higher return. B) if one security has a higher return than another and at the same time has a lower risk, choose it. C) if two securities offer the same rate of return, choose the one with the lower risk. D) if one security has a higher return than another and at the same time has a higher risk, choose it.

D) if one security has a higher return than another and at the same time has a higher risk, choose it.

Although there are others that may be used in construction of a portfolio, the primary asset classes used in asset class allocation include: I. bonds. II. cash. III. commodities. IV. stock.

I, II, and IV.

One of the asset allocation classes is fixed income securities. When an investment adviser representative is determining which securities should fill that portion of the client's portfolio, which of the following would not be included? A) Treasury bonds B) Mortgage-backed securities C) Preferred stock D) Municipal bonds

C) Preferred stock

An investment adviser representative may describe dollar cost averaging to a customer as

a funding technique that will cause the average cost per share to be less than the average price per share

ABC Corporation, whose common stock is listed on the NYSE, declares a $3.00 per share cash dividend to its shareholders. ABC has paid dividends of only $.07 per share for each of the last 15 quarters, and market analysts had anticipated a similar dividend this quarter. In an efficient market, one would expect

a price increase upon the announcement.

An investor is long 100 shares of XUZ common stock. If the investor wishes to generate some additional income while also creating a partial hedge, the recommended strategy would be to

go short an XUZ call.

Value investors

seek securities that are undervalued or selling for less than their intrinsic value

The capital asset pricing model (CAPM) is used by many to assess the expected return of a security. If the current risk-free rate is 3%, the current return on the market is 10%, and a particular stock's beta is 1.4 with a standard deviation of 2.2, the expected return would be

12.8%

If the current risk-free rate is 3% and the expected market risk premium is 6%, what return should we expect from a security that has a beta of 2?

15%

If the expected return on the market is 20% and the risk-free rate is 4%, a stock with a beta coefficient of 0.8 would have an expected rate of return under CAPM of

16.8%.

The current market interest rate for a bond rated AA with 20 years to maturity is 5%. In an efficient market, a similar bond with a coupon of 4% could be expected to have an internal rate of return of

5%

Over the past year, the market, with a beta of 1.0, has returned 15%. Under CAPM, which of the following stocks would be considered overvalued? A) RJP, beta 1.2, return 17.5% B) BED, beta 1.5, return 23.5% C) ACR, beta 0.9, return 13.6% D) LQR, beta 0.7, return 11%

A) RJP, beta 1.2, return 17.5%

Your client's child is entering college next year. Which of the following would be the most appropriate recommendation? A) A U.S. Treasury note mutual fund B) A five-year laddered portfolio of U.S. Treasury notes C) A zero-coupon bond maturing in five years D) A large-cap growth fund

B) A five-year laddered portfolio of U.S. Treasury notes

Which of the following describes an investment management style? A) Rebalancing B) Large capitalization C) Current income D) Margin

B) Large capitalization

One of the offshoots of the capital asset pricing model (CAPM) is the capital market line (CML). The equation for the CML uses which of the following? A) Beta B) Standard deviation C) Correlation coefficient D) Alpha

B) Standard deviation

Which of the following is an example of a passive investment management style? A) Value investing B) Use of index funds in conjunction with selecting specific securities in the index to overweight certain sectors C) Exclusive use of index funds D) Investment in small capitalization technology securities

C) Exclusive use of index funds

Ian is a technical analyst who believes the market, as represented by the S&P 500 Index, is overbought. Over the next several months, there is a 12% correction. Which of the following strategies would have been successful for Ian?

Sell futures contracts on the S&P 500 Index

An investor believes that he can study the history of security trades and security markets in order to identify buying opportunities. Furthermore, he prepares and studies charts on the past prices of the securities he is most interested in purchasing for his portfolio. He uses these charts to try to predict the future activity of a particular stock. What type of strategy is this investor using to make his investment decisions?

Technical analysis

A client wishing to hedge a long stock position would be most likely to:

buy a put on that stock.

Your client owns 500 shares of RMBN purchased at $11.94 per share. The stock is now selling for $12.70 per share, and the client is concerned that the market may turn downward. You could suggest protecting the profit by

buying five RMBN 12.50 puts.

In contrast to the strategic approach, tactical asset allocation

continuously adjusts the asset allocation and class mix in an attempt to take advantage of changing market conditions.

Under the modern portfolio theory (MPT), risk aversion means that if two assets have identical expected returns, an investor will choose the asset with the

lower risk level.

When attempting to construct the optimal portfolio, the investment adviser is looking to obtain

the maximum return for the least risk.

In a financial market that is efficient,

the prices of securities will not differ from their justified economic values for any length of time.

One feature employed by portfolio managers using a passive style is rebalancing. The purpose of this technique is

to bring the portfolio mix back to the original asset allocation percentages

As a technique in portfolio management, portfolio diversification reduces

unsystematic risk.

An investment adviser is doing some research on a company and notices that the current market price is $21 per share. The most recently reported earnings per share is $3, and the company is paying a $0.26 quarterly dividend. On the balance sheet, the company is carrying a significant amount of cash. This company would probably be attractive to this adviser if his investment style was

value.

According to the efficient market hypothesis, information found when reading The Wall Street Journal would be considered

weak form market efficiency.

An individual who is a proponent of the efficient market hypothesis (EMH) will likely invest in which of the following? A) Index funds B) Sector mutual funds C) Balanced mutual funds D) Growth mutual funds

A) Index funds

Which of the following is an example of dollar cost averaging? A) Investing $200 into the KAPCO Growth Fund on the 15th of each month B) Maintaining a constant dollar plan in the KAPCO Growth Fund C) Buying shares of the KAPCO Growth Fund when the price is declining and selling shares when the price is rising D) Purchasing 25 shares of the KAPCO Growth Fund on the 15th of each month

A) Investing $200 into the KAPCO Growth Fund on the 15th of each month

Olga holds XYZ stock. The stock recently increased in value by 50%. She would like to preserve as much of this gain as possible and retain the potential for additional price increases. Which strategy best meets Olga's goal? A) Short the stock B) Buy a put option C) Buy a call option D) Write a call option

B) Buy a put option

A securities analyst does not believe that markets are highly efficient. This analyst most likely follows which of the following investing strategies? A) Passive B) Tactical C) Indexing D) Strategic

B) Tactical

A fundamental analyst researching a stock is concerned with all of the following except A) management efficiency B) volume of shares traded C) capitalization ratio D) the stock's market price as a multiple of the company's earnings

B) volume of shares traded

One of your retired clients aims to maintain a 70%/30% relationship between bonds and equities in her portfolio. At the beginning of the year, the mix was $1.4 million in bonds and $600,000 in equity. At the end of the year, her bonds were worth $1.54 million. Rebalancing the portfolio would not be required if the equities were worth A) $666,000 B) $462,000 C) $660,000 D) $513,333

C) $660,000

A mutual fund investor is using a dollar cost averaging strategy. For the average price per share to exceed the investor's average cost, which of the following conditions must be present? I. The market price per share fluctuates with each purchase. II. A fixed dollar amount is invested at regular intervals. III. A fixed number of shares is purchased monthly. IV. A constant dollar value is maintained in the account

I and II

An investor does not wish to attempt to time the market, so she invests $300 each month into the GEMCO Growth Fund. Over the past five months, her purchase prices have been $10, $12, $15, $20, and $25. On the basis of this information, if she were to stop investing at this point and sell her shares two months from now when the net asset value (NAV) is $15 per share and the public offering price is $15.79, it would be correct to state that her A) cost basis for tax purposes was $14.71. B) realized loss was $1.40 per share. C) proceeds were $15.79 per share. D) average cost per share was $16.40.

A) cost basis for tax purposes was $14.71.

An analyst using the dividend growth model would take into account all of the following factors except A) the current dividend. B) the current earnings per share. C) the growth of the dividend. D) the investor's required rate of return.

B) the current earnings per share.

A portfolio manager using index options is trying to hedge which of the following types of risks? A) Selection B) Purchasing power C) Financial D) Systematic

D) Systematic

A portfolio manager who believes equity securities are overvalued in the short term reduces the weight of equities in her portfolio to 35% from its longer term target weight of 40%. This decision is best described as an example of A) strategic asset allocation. B) contrarian investing. C) rebalancing. D) tactical asset allocation.

D) tactical asset allocation.

Which of the following statements about diversification are true? I. Diversification involves investing a portfolio in 1, or very few, classes of investments. II. Diversification is a way to reduce unsystematic risk in a portfolio. III. Diversification is a defensive investment strategy.

II and III

All of the following statements regarding asset allocation done by or on behalf of an investor are true except A) individual security selection is far more important than the asset allocation decision B) the process is concerned with the risk associated with different assets C) the process is concerned with the relationship among the returns of different assets D) it is the process of dividing investable assets into different asset classes

A) individual security selection is far more important than the asset allocation decision

If an investor practices value investing, which of the following stock types is the investor least likely to purchase? A) A stock that has exhibited a high dividend yield in the past Incorrect Answer B) A stock with negative earnings in the most recent quarter Incorrect Answer C) A stock that is presently selling for ⅔ of net tangible assets Incorrect Answer D) A stock with an above-average price-to-earnings ratio

D) A stock with an above-average price-to-earnings ratio

An investor can choose between 4 portfolios with the following expected returns and standard deviations. Expected Return Standard Deviation I. 8% 20% II. 6% 21% III. 8% 21% IV. 7% 23% Based on modern portfolio theory (MPT), which portfolio should the investor choose?

I

One method used by some analysts to estimate the future value of a stock is the dividend growth model. This model would probably be most useful in the case of

a large-cap stock

The use of futures to hedge against a price increase is best referred to as

a long hedge.

All of the following are examples of a portfolio diversified through asset allocation except A) Daniella's portfolio, which consists of shares of common stock, municipal bonds, and money market funds. B) Dakota's portfolio, which consists of shares of common stock, corporate bonds, and jumbo CDs. C) Daniel's portfolio, which consists of shares of common stock in 52 different corporations. D) Dawson's portfolio, which consists of shares of preferred stock, Treasury bonds, and Treasury bills.

C) Daniel's portfolio, which consists of shares of common stock in 52 different corporations.

Which of the following statements is true? A) A corporation is required to pay a cash dividend to stockholders if the earnings are sufficient, especially if it is of preferred stock. B) A growth company would be more likely to pay a cash dividend than a stock dividend. C) A stock split increases the owner's proportionate share of the company. D) Dividends have a significant influence on the value of the corporation's stock.

D) Dividends have a significant influence on the value of the corporation's stock.

A stock has been in a downtrend for several days. When its price decreases to near $30, many investors enter orders to buy the stock and the price increases to $31. This is most likely an example of

a support level.

Given below are the EPS for the previous four quarters for four different companies being analyzed by your research department. Which of these companies is exhibiting earnings momentum? A) DEF - Q1: $0.58; Q2: $0.52; Q3: $0.50; Q4: $0.49 B) JKL - Q1: $0.82; Q2: $0.90; Q3: $0.83; Q4: $0.92 C) GHI - Q1: $0.25; Q2: $0.27; Q3: $0.30; Q4: $0.36 D) ABC - Q1: $0.58; Q2: $0.61; Q3: $0.64; Q4: $0.67

C) GHI - Q1: $0.25; Q2: $0.27; Q3: $0.30; Q4: $0.36

All of the following statements concerning the EMH are correct except A) an efficient market is one in which the prices of securities quickly and fully reflect all currently-available security market information. B) the efficient market hypothesis states that securities markets are efficient, with the prices of securities reflecting their current economic value. C) investors usually react slowly to new and random information pertaining to all currently-available security market information. D) the weak form of market efficiency involves market data, whereas the semi-strong and strong form involve the assimilation of all public and private information, respectively.

C) investors usually react slowly to new and random information pertaining to all currently-available security market information.

Proponents of which of the following technical theories assume that small investors are usually wrong? A) Short interest B) Advance/decline C) Breadth of market D) Odd lot

D) Odd lot

An adviser who does not believe he can time the market, or pick those securities that will outperform their benchmarks, would have which of the following as the most important portfolio consideration? A) Looking for asset classes that will outperform their benchmarks B) Selecting stocks that are expected to outperform their benchmarks C) Minimizing investment expense and proper asset allocation D) Maximizing current income to provide a solid base for total return

C) Minimizing investment expense and proper asset allocation

Which of the following statements about technical analysis are true? I. Technical analysis tries to identify trends and predict market changes. II. Technical analysis is often accomplished by reviewing data in the form of charts. III. Technical analysis looks primarily at past performance to predict future trends

I, II, and III

Which of the following statements regarding a bond ladder strategy is correct? A) A laddered portfolio of bonds will provide lower yields than a portfolio consisting entirely of short-term bonds. B) A bond ladder strategy is generally more aggressive than a bond barbell strategy. C) A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk. D) A bond ladder strategy involves the purchase of very long-term and very short-term bonds.

C) A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk.

A fundamental analyst would be interested in all of the following except A) daily trading volumes on the NYSE B) statistics of the U.S. Department of Commerce on disposable income C) corporate annual reports D) innovations within the automotive industry

A) daily trading volumes on the NYSE

Which of the following investors aligns most closely with the strong form of the efficient market hypothesis (EMH)? A) An investor using dollar cost averaging to purchase shares in growth mutual funds having the highest portfolio turnover. B) An investor who researches corporate annual reports and industry publications to uncover buy-and-sell opportunities within an industry or individual security. C) An investor who uses stock charts to predict price movements and capitalize on buy-and-sell opportunities. D) An investor using a buy-and-hold strategy dollar cost averaging into an S&P 500 Index fund.

D) An investor using a buy-and-hold strategy dollar cost averaging into an S&P 500 Index fund.

Buying stocks with high P/E ratios normally reflects which of the following investment styles?

Growth

An analyst uses the dividend growth model to assist in determining appropriate stocks to recommend. This analyst would consider all of the following factors except A) current dividend B) required rate of return C) growth of the dividend D) market capitalization

D) market capitalization

Diversifying a portfolio could be expected to provide all of the following benefits except A) dampening volatility. B) reducing overall risk. C) improving returns. D) reducing transaction costs

D) reducing transaction costs

Customer A and Customer B each have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments? I. Receiving cash distributions may reduce Customer A's proportional interest in the fund. II. Customer A may use the cash distributions to purchase shares later at NAV. III. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. IV. Due to compounding, Customer B's principal will be at greater risk.

I and III