Unit 15
Which of the following explains that including noncorrelated assets in a portfolio can reduce certain risks? A) Beta coefficient B) Capital asset pricing model (CAPM) C) Alpha coefficient D) Modern portfolio theory (MPT)
D) Modern portfolio theory (MPT) Instead of emphasizing particular stocks, MPT focuses on the relationships among all the investments in a portfolio. This theory holds that specific risk can be diversified away by building portfolios of assets whose returns are not correlated.
SSS Corporation's total assets amount to $780,000, of which $260,000 represents current assets. Total liabilities equal $370,000, of which $200,000 is considered long-term or other liabilities. What is the equity of SSS Corporation's shareholders? A) $170,000 B) $980,000 C) $410,000 D) $1,150,000
C) $410,000 Total assets minus total liabilities equals shareholders' equity ($780,000 - $370,000 = $410,000).
An analyst reports that a stock's price is consolidating. This means A) the stock's trendline is moving primarily in a downward direction. B) no distinct pattern can be observed. C) the stock's trendline is moving primarily in a horizontal direction. D) the stock's trendline is moving primarily in a upward direction.
C) the stock's trendline is moving primarily in a horizontal direction. In general, when the trendline of a stock's market price is moving within a very narrow range (the chart is basically a pattern of horizontal movement), the technician views that as a consolidation. Within a relatively short time after the consolidation has been verified, it is expected the price will move. What isn't determined yet is if the movement will be up (bullish) or down (bearish).
An exemption from the 5% markup policy applies to A) transactions taking place on a listed exchange. B) transactions taking place in the OTC market. C) agency transactions where no markup or markdown is charged. D) transactions in securities accompanied by a prospectus.
D) transactions in securities accompanied by a prospectus. The 5% policy does not apply to exempt securities transactions such as municipal bond trades or new issue (primary market) transactions because the price is fixed in the prospectus. The policy does apply to nonexempt securities and transactions on an exchange and in the OTC market. It applies to transactions where the participants were acting in either an agency or principal capacity charging commissions or markup/markdown, respectively.
Which of the following would be of least interest to a technical analyst? A) Price-to-earnings (P/E) ratio B) Trading volume C) Advance/decline line D) Short interest ratio
A) Price-to-earnings (P/E) ratio Technical analysts rely on price and trading trends to determine when to buy or sell stock. They are not interested in the specific financial information of an issuer. P/E ratios are of greater interest to fundamental analysts.
Which of the following describes additional paid-in capital? A) The difference between the total dollar amount received from the issuance of common stock and the stock's aggregate par value B) May also be called earned surplus C) Total of all residual claims that stockholders have against the corporation's assets D) Total of all earnings since a corporation was formed, less dividends
A) The difference between the total dollar amount received from the issuance of common stock and the stock's aggregate par value Additional paid-in capital is the difference between the dollar amount received from the sale of stock and the stock's aggregate par value. Earned surplus is another name for retained earnings.
If a married couple establishes a joint tenants with right of survivorship (JTWROS) account with a balance of $1 million and the wife dies, what is the husband's estate tax liability? A) He pays federal and state taxes on $500,000. B) He pays no estate tax. C) He pays federal taxes only on $500,000. D) He pays federal and state taxes on the entire balance.
B) He pays no estate tax. Establishing a JTWROS account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction.
When an insured person becomes disabled or unable to work, that person may not be required to continue paying premiums on the contract if the contract included A) a disability rider. B) a low-income provision. C) a waiver-of-premium option. D) a freeriding provision.
C) a waiver-of-premium option. A waiver of premium option allows the premiums on an insurance contract to be waived for a person who has become disabled or otherwise unable to work.
When the inside market (best bid and best offer) for XYZ stock was 17.30-17.60, a market maker bought 100 shares from a customer at 16.90. At the time of the trade, the market maker's market was 17.25-17.70. What was the amount of the markdown? A) $0.65 B) $0.75 C) $0.35 D) $0.40
D) $0.40 Markdown is always based on the inside quote. In this case, the inside bid is 17.30 and the difference between that and the 16.90 buying price represents a $0.40 markdown.
Asset allocation refers to the spreading of portfolio funds among different asset classes with different risk and return characteristics. When allocating among asset classes, you would not include A) cash and cash equivalents. B) stock. C) bonds. D) ETFs.
D) ETFs. ETFs are a way of investing in equity (stock) or debt (bonds) securities and are not a separate asset class.
The IRS allows investors to minimize tax liability when reporting sales by limiting gains or maximizing loses in anticipation of what an investor's year-end tax liability might be. Given year-end tax needs can only be anticipated when a sale occurs, which of the following reporting methods allows an investor the most flexibility? A) Last in, first out (LIFO) B) Share identification C) Average cost basis D) First in, first out (FIFO)
B) Share identification For investors, the idea is to minimize tax liability if possible by limiting gains or maximizing losses in anticipation of what one's year-end tax liability might be. The IRS allows three methods of reporting: share identification, FIFO, and average cost basis. Of the three allowable methods, share identification is the most flexible. Using this method, the investor keeps track of the cost of each share purchased and specifies which shares to sell based on anticipated year-end tax needs.
All of the following will affect the working capital of a corporation except A) an increase in current assets. B) payment of a cash dividend. C) a decrease in current liabilities. D) declaration of a cash dividend.
B) payment of a cash dividend. Working capital is defined as current assets minus current liabilities. On the declaration date, the future dividend payment is booked as a current liability (dividend payable). When the payment date comes, disbursement of the cash dividend will reduce current assets (cash) and current liabilities (dividend payable) by the same amount, leaving working capital unchanged.
In portfolio theory, the alpha of a security or a portfolio is A) a measurement of a portfolio's performance versus a standard benchmark such as the S&P 500. B) the difference between the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved. C) a measure of the variance in returns of a portfolio divided by its average return. D) the risk of the portfolio associated with the factors that affect all risky assets.
B) the difference between the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved. Alpha is the difference between the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved. The higher the alpha, the better the portfolio has done in achieving excess or abnormal returns. The risk of the portfolio associated with the factors that affect all risky assets is systematic risk.
On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes? A) None B) $40 C) $75 D) $100
C) $75 Because he purchased the convertible bond less than 30 days after realizing the loss, the sale of the stock falls under the wash sale rule: investors who sell securities at a loss and repurchase them, including their equivalents, 30 days before or after the sale will have the loss disallowed by the IRS. With a conversion price of $40, the bond could be converted into 25 shares (1,000 ÷ 40) of KLP common stock. Hence, the investor has bought back the equivalent of 25 shares and may only declare a $75 loss, as the remaining $25 loss will be disallowed.
Net worth is equal to A) liabilities minus assets. B) income minus liabilities. C) assets minus liabilities. D) liabilities minus income.
C) assets minus liabilities. The balance sheet offers a snapshot of a firm's resources and obligations based on the firm's most recent reporting date. The basic balance sheet equation is assets minus liabilities equals net worth.
Some analysts use an industrial corporation's balance sheet to arrive at what might be considered the intrinsic value per share of the enterprise. That calculation is known as A) earnings per share. B)retained earnings per share. C) book value per share. D) net asset value per share.
C) book value per share. Book value per share is calculated by subtracting the liabilities and par value of preferred stock (if any) from the tangible assets as shown on the balance sheet. Common stock prices can be above, below, or very close to the book value per share depending on the kind of industry and current economic conditions. If the company liquidated, holders of the common stock could receive something close to the book value, but that would depend on how the assets were valued. Earnings per share uses the income statement, not the balance sheet, and has nothing to do with intrinsic value. As far as the exam is concerned, net asset value per share relates solely to investment companies, not industrial corporations. Retained earnings is only part of the company's book value and will be less than the book value.
A fundamental analyst researching a stock is concerned with all of the following except A) the capitalization ratio. B) the stock's market price as a multiple of the company's earnings. C) the volume of shares traded. D) management efficiency.
C) the volume of shares traded. A fundamental analyst is concerned with the economic climate, the inflation rate, how an industry is performing, a company's historical earnings trends, how it is capitalized, and its product lines, management, and financial statement ratios, such as the P/E ratio. A technical analyst is concerned with trading volumes or market trends and prices.
Liquidity ratios measure the solvency of a firm, or the firm's ability to meet short-term financial obligations. Which of the following is a liquidity ratio? A) Dividends divided by earnings per share B) Gross profit divided by net sales C) Net income divided by average total equity D) Current assets divided by current liabilities
D) Current assets divided by current liabilities Current assets divided by current liabilities is the current ratio, a ratio that measures the liquidity of a firm. Gross profit divided by net sales is a profitability ratio that measures the gross profitability of the firm's business operations, not its liquidity. Net income divided by average total equity is the return on stockholders' equity, which measures the efficiency of common shareholders' investment or equity in the firm. Dividend amount divided by earnings per share is the dividend payout ratio, which measures how much of a company's earnings are distributed to common stockholders.
