Unit 10

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

A

The discount rate that makes the NPV of all cash flows from a security equal to zero is A) the cash flow adjusted return B) the present value return C) the median return D) the internal rate of return

D

According to most fundamental analysts, examining a company's price/earnings ratio gives an indication of A) how much investors value the stock as a function of the company's market price to its earnings B) the parity price of the issuer's convertible bonds C) current cash flows D) the degree to how liberal the company's dividend policies are

A

An investor reviewing the performance of a security reads that its returns for the past 9 years are +9%, -4%, +13%, +6%, +2%, -8%, +11%, +2%, +5%. Using this information, which of the following is NOT a correct statement? A) Range is 11% B) Mean is 4% C) Median is 5% D) Mode is 2%

A

Over the past 5 years, a stock has had returns of +16%, +5%, -4%, +12% and +8%. The median of the returns is A) 8.0% B) 8.2% C) 9.0% D) 7.4%

A

If the required rate of return is less than anticipated in a present value calculation, the effect would be that the A) future value would be lower B) present value would be higher C) present value would be lower D) yield to maturity (YTM) would decrease

B

In a group of returns, the central value of observations arranged in order of lowest to highest is known as the A) mode B) mean C) median D) range

C

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 A) beta B) NPV C) IRR D) alpha

D

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

D

Which of the following correlations would represent 2 assets that tend to move in tandem with one another? A) −0.11 B) −0.68 C) +0.81 D) +0.16

C

A portfolio manager with a growth style would probably diversify by A) placing a portion of the portfolio into high-yield bonds B) attempting to build a portfolio with a very high correlation C) concentrating in stocks in 1 or 2 industries D) devoting a portion of the portfolio to securities with a negative correlation

D

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 A) 1.50 to 1 B) 1.00 to 1 C) 1.25 to 1 D) 0.75 to 1

D

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

D

Which of the following attributes of common stock best describes why internal rate of return (IRR) is not generally used to determine the return on common stock? A) No net present value B) Uneven cash flows and no maturity C) Uneven cash flows D) Uneven cash flows, no maturity date and price

D

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

D

A portfolio manager who is successful at market timing will A) increase the beta of the portfolio in advance of a rising market B) have a portfolio beta less than the beta required by the client C) increase the beta of the portfolio in advance of a declining market D) decrease the beta of the portfolio in advance of a rising market

A

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 A) −66% and +66% B) −1% and +23% C) +5% and +17% D) −7% and +30%

B

A grandparent wants to provide $1,000 per month in income in perpetuity to a great-grandchild. With a 4% projected rate of return, what amount does the grandparent need to invest? A) $300,000 B) $30,000 C) $25,000 D) $250,000

A

Under the net present value (NPV) method of evaluating investments, an investment is attractive if the net present value of the expected returns is A) greater than zero B) less than zero C) greater than the risk-adjusted return D) equal to zero

A

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 A) negative alpha B) positive correlation C) positive alpha D) zero alpha

C

At age 18, Joan's trust fund becomes available to pay for her higher education. There is $100,000 in the fund, all invested in fixed income securities with an average coupon of 6%. If the estimated cost of college for the next 4 years is $30,000 per year paid at the beginning of the school year, how long will the money last? A) 3 years with approximately $25,009 available for the 4th year B) 3 years with approximately $28,000 available for the 4th year C) 4 years with approximately $4,000 remaining D) 3 years with approximately $17,863 available for the 4th year

D