Series 66 Chapter 23
In order to compute the real rate of return for a security, it would be necessary to know all the following EXCEPT A) the beta of the security B) the purchase price C) the annual dividend D) the CPI
A The real rate of return is the actual return less the inflation rate as measured by the CPI.
Your client is considering the purchase of a small-cap fund. Which of the following benchmarks would be most appropriate for comparing the fund's performance? A) Wilshire 5,000 B) Russell 2,000 C) S&P 500 D) DJIA
B
A portfolio manager's performance is often measured against a benchmark such as the S&P 500. A manager whose performance beats the benchmark by taking greater risk than the S&P 500 may not have had superior returns as measured on A) an inflation-adjusted basis B) a total-return basis C) a risk-adjusted basis D) an expected-return basis
C
Given the following information, calculate the risk-adjusted return. 91-day T-bill rate: 4% Actual return: 14% Beta = 1.4 CPI: 3% Standard deviation: 5.0 A)10% B)11% C)2% D)5%
C
The yield to maturity of a bond represents the bond's A) net present value (NPV). B) real rate of return. C) internal rate of return (IRR). D) annualized rate of return.
C
Which of the following indices or averages is based on the prices of only 65 stocks (30 industrial, 20 transportation, and 15 utility)? A) S&P Composite B) Value Line C) Dow Jones Composite Average D) Wilshire 5,000
C
If you knew a given stock had a 40% chance of earning a 10% return, a 40% chance of earning −20%, and a 20% chance of earning −10%, the expected return would be equal to A) −10% B) 14% C) 10% D) −6%
D
To assess the performance of a small-cap stock fund you compare its results against A) the S&P 500 B) the Dow Jones Industrial Average C) the S&P 100 D) the Russell 2000
D
An investor purchases shares of ABC stock at $50 per share. One year later, ABC is selling for $54 per share and, at the end of the 2nd year, the price is $52 per share. ABC has paid dividends of $2 per year. Upon liquidation, the investor would have earned a return of A) $2 per share B) $4 per share C) $8 per share D) $6 per share
D The investor paid $50 and sold it for $52 for a $2 per share gain. During the 2-year holding period, $4 in dividends were paid. That is a total return of $6 per share.
Which of the following indexes represents the largest portion of the domestic stock markets? A) Russell 2000 B) Wilshire 5000 C) MSCI EAFE D) Standard & Poor's 500
B
ABC's stock has paid a regular dividend every quarter for the past several years. If the price of the stock has remained the same over the past year, but the dividend amount per share has increased, it may be concluded that ABC's A) current yield per share has increased B) current yield per share has decreased C) yield to maturity has gone up D) current yield per share has been unaffected
A
An investor purchased stock for $50 per share at the beginning of the year. In December, the investor liquidated his stock for $55 per share, while also receiving dividends of $2 per share during the year. Assuming an inflation rate of 3%, what is the investor's real rate of return? A) 11% B) 10% C) 4% D) 14%
A
Expected return is A) an estimate of probable returns an investment may yield B) the difference between an investment's present value and its cost C) the worth of future income discounted to reflect what that income is worth today D) the one discount rate that equates the future value of an investment with its net present value
A
In order to compute a client's realized holding period return, it is NOT necessary to know A) the paper profits and losses B) the income received C) the original investment D) the ending value
A
One of the important roles of an investment adviser representative is assisting clients in analyzing the performance of securities held in their portfolios. Which of the following is the best measurement of a security's performance? A) Total return B) Beta C) Yield D) Standard deviation
A
The Sharpe ratio is a measurement of a portfolio's A) risk-adjusted return B) after-tax rate of return C) inflation-adjusted return D) holding period return
A
The real interest rate of a fixed income investment is A) the interest earned after inflation B) interest earned after taxes C) the coupon interest payment D) interest earned adjusted for the investment's premium or discount price
A
Which of the following has the highest real return? A) A bond that yields 5% when inflation is 1% B) A bond that yields 8% when inflation is 5% C) A bond that yields 6% when inflation is 4% D) A bond that yields 10% when inflation is 7%
A
Which of the following is price-weighted rather than cap-weighted? A) Dow Jones Industrial Average B) Russell 2000 C) Wilshire 5000 D) Standard & Poor's 500
A
Which of the following statements regarding the Sharpe ratio is TRUE? A) The Sharpe ratio is often used to measure risk-adjusted return of an entire portfolio. B) The Sharpe ratio cannot be used to measure risk-adjusted performance for a single security. C) Portfolios with lower Sharpe ratios provided higher excess returns per unit of risk assumed than those with higher Sharpe ratios. D) The Sharpe ratio uses beta in its formula.
A
You are viewing 2 securities to place in a client's portfolio. Security A has an expected return of 12%, and Security B has an expected return of 16%. If you were to place 25% of the portfolio into Security A with the balance going into Security B, the probable return of the portfolio is A) 15% B) 18% C) 7% D) 14%
A
An investor purchases 100 shares of Shilaf Baby Products, Inc. (SBPI) at $60 per share. SBPI pays quarterly dividends of $.55. One year after the purchase, SBPI is at $66 per share, and after the second year, its market price is $63 per share. If the investor were to close out the position at this time, the total return would be A) 12.33%. B) 17.33%. C) 6.83%. D) 8.67%.
A
An investor owns a common stock that has been paying a dividend at an annual rate of $2.00. If the investor buys 100 shares of the stock at $50 and sells it 3 months later for $52, the approximate annualized rate of return is A)4% B)20% C)12% D)5%
B Annualized rate of return is computed by taking the investor's total return and annualizing it. In this case, the investor had $2 of appreciation and $0.50 (1 quarter) in dividends. Total return of $2.50 divided by the $50 cost is 5%. But, that is for 3 months − 1 quarter. Multiply that by 4 to get the annual rate.
One measure of an investor's total return is called holding period return. The computation includes both income and appreciation and is used for both debt and equity securities. An investor's holding period return would be less than the bond's yield to maturity if A) the investor purchased a put option on the bond B) the coupons were reinvested at a rate below the yield to maturity C) the bond was called at a discount D) the bond was redeemed at a premium
B The calculation of yield to maturity assumes reinvestment of the bond's interest at the coupon rate. Therefore, if the investor was only able to do less than that, the holding period return would be decreased. This is part of the concept of internal rate of return (IRR), which takes into consideration the time value of money (compounding). It is tempting to choose the answer "a call at a discount," but bonds are never called at a price below par. Just keep it simple: If the question says you can earn less than the YTM, your return will be lower than the quoted YTM.
If an agent recommends that a client invest a portion of his portfolio in an international stock fund and is asked whether she should compare the performance of the fund against the S&P 500 Index, how should the agent respond? A) There is no appropriate benchmark against which an investor can compare a portfolio of foreign securities. B) No, it is preferable to compare the fund against the Russell 2,000 Index because it covers smaller corporation stocks. C) Yes, the S&P 500 is an appropriate benchmark against which to compare the performance of all equity funds. D) No, it is preferable to compare the fund against the Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index because it covers international securities.
D
When an investor's original value is subtracted from the ending value, and then has the income received over that time period added to it, which is then divided by the original cost, the result is A) annualized return B) internal rate of return C) expected return D) holding period return
D
When an income-oriented investor wishes to compute the current yield of a specific investment, which one of these items would NOT be considered? A) Dividends paid B) Current market price C) Interest coupon D) Net present value
D The current yield of any investment is the income return (dividends on equity; interest on debt) divided by the current market price. The NPV is a tool that evaluates the reasonableness of the price of an investment.
KapCo Balance Fund has a NAV of $9.50 and POP of $10. Over the past 12 months, it distributed dividends totaling $.75 and capital gains totaling $1.00. What is KapCo's current yield? A)7.9% B)17.5% C)10% D)7.5%
D This question gives you excess information. The first point is that capital gains are not included in calculation of a mutual fund's current yield. You must also remember that the NAV is not involved. The calculation is: $0.75 (annual dividend) = 7.5% ______________________________________________ $10.00 (POP)
When an analyst takes a stock's actual return minus the risk-free return and divides that remainder by the stock's standard deviation, the result is A) the alpha. B) the expected return. C) the beta. D) the Sharpe ratio.
D
A client purchased a security for $60 and sold it 1 year later for $59. If he received 4 quarterly dividends of $0.50 each during the period, his total percentage return would be A) 3.30% B) 1.67% C) 0% D) 2%
B
Which of the following is a method for determining the internal rate of return by portfolio managers without the influence of additional investor deposits or withdrawals to or from the portfolio? A) Discounted cash flow B) Dollar cost averaging C) Time-weighted return D) Dollar-weighted return
C
A bond of standard size has a nominal yield of 6%, paid in the customary fashion. The bond matures in 10 years, is callable at $105 in 5 years, and is currently priced at $110. An investor calculating the bond's yield to call would include A) the loss of $100 at maturity. B) 20 payment periods. C) the gain of $50 when called. D) the semiannual interest payments of $30.
D The yield to call computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. A bond with a 6% coupon (nominal yield) will make $30 interest payments twice each year. Remember, unless otherwise stated, bonds have a par value of $1,000 and customarily pay interest semiannually. With a 5-year call, there are only 10 payment periods, not 20. The loss at call is $50 ($1,100 - $1,050); there is no gain and the loss at maturity of $100 is only relevant for YTM, not YTC.
In order to compute an investor's real rate of return on a common stock holding, all of the following are necessary EXCEPT A) appreciation B) dividends C) inflation rate D) marginal tax bracket
d
An investor invests a total of $30,000 and creates a portfolio of 3 different stocks placing 1/3 of his investment into each security. From his holding in Company A, he receives a dividend of $600; from Company B, a dividend of $500; and from Company C, no dividend. One year later, the market price of the Company A stock has increased by 20%, Company B's stock increased by 10%; and Company C's stock has remained the same. What is the investor's total return on this portfolio? A) 3.67% B) 13.67% C) 10% D) 4.56%
B
The total return on a bond that cost an investor $950, was sold for $1,000, and paid $50 in interest payments is nearest to A) The return cannot be determined from the information supplied B) 5.26% C) 10.00% D) 10.53%
D
The Sharpe ratio measures a stock's A) excess return earned compared to its unsystematic risk. B) excess return earned compared to its systematic risk. C) excess return earned compared to its total risk. D) return earned compared to its total risk.
C The Sharpe ratio is defined as a fund's excess return (fund's return exceeding the risk-free rate) divided by the total risk (standard deviation).
Which of the following is not a market cap-weighted index? A) Morgan Stanley Capital International B) S&P 500 C) FTSE 100 and FTSE All-Share D) Dow Jones Industrial Average
D
The total return of a mutual fund is equal to A) the return attained by reinvestment of all dividend and capital gains distributions plus unrealized gains or minus unrealized losses B) annualized fund dividends divided by the current POP C) the reinvestment of all unrealized dividend and capital gain income D) all realized and unrealized capital appreciation
A As with all securities, total return includes unrealized gains or losses. In the case of mutual funds, the total return also assumes reinvestment of all dividend and capital gains distributions.
On June 20, 2016, an investor in the 30% marginal federal tax bracket acquired a growth stock paying no dividend for $10 per share. On June 22, 2017, the investor sold the stock for $20 per share. Presuming capital gains rates are 15%, the investor's after-tax rate of return is closest to A)100% B)85% C)200% D)70%
B LONG TERM --> cap gains rate Although the stock grew at a 100% rate of return (by doubling), the investor must pay capital gains tax on the investment at 15%, and the investor realizes an after-tax rate of return of approximately 85%. Because the investor held the stock for more than 1 year, the sale is taxed at a favorable capital gains rate rather than at the investor's ordinary income tax rate.
An investor purchases a 6% callable senior lien mortgage bond at par. Exactly two years later, the bond is called at 102½. The investor's total return is A) 8.5%. B) 14.5%. C) 9.5%. D) 7.25%.
B Total return consists of income plus gain. Buying this bond at par and having it called at 102½ ($1,025) results in a $25 gain. With a 6% coupon, there will be four semiannual interest payments of $30 in a two-year holding period. Adding the $25 + $120 = $145 total return on an investment of $1,000 which = 14.5%. Please note that the question didn't ask for the annualized rate of return. That would be approximately 7.25% per year.
With the current rate of the 91-day Treasury bill at 2%, a stock paying dividends at a rate of 4% and having a total return over the measured period of 7% would have a risk premium of A) 2% B) 9% C) 5% D) 4%
C The risk premium is a premium demanded for internal and external risk factors. It is the amount of total return in excess of the risk-free rate. In this case, the total return is 7% (the dividend return is included in the total) minus the 2% T-bill rate.
ABC Combination Fund has dual objectives of capital appreciation and current income. Last year, the fund paid quarterly dividends of $0.25 per share and capital gains of $0.10 per share. The annualized growth rate of the fund was 15%. The current net asset value (NAV) of the fund is $28.50, and the current public offering price (POP) is $30. Advertising and sales literature of the fund may report the fund's current yield to be A) 83% B) 3.85% C) 3.33% D) 27.20%
C USE POP!
Bill will put money into stocks only if he expects that stock returns, over time, will outpace bond returns by some amount that compensates him for the added volatility of owning stocks. This reflects A) time premium B) option premium C) premium priced bonds D) risk premium
D Investors will put money into stocks only if they expect that stock returns, over time, will outpace bond returns by some amount that compensates them for the added risk of owning stocks. This extra return from stocks is known as risk premium-literally, the premium an investor receives in exchange for owning a riskier, more volatile instrument.
During the past year, the market price of Kapco common stock has increased from $47 to $50 per share. Over that period, Kapco's earnings per share (EPS) have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, the current yield on Kapco common stock is A) 6.34% B) 2.13% C) 2% D) 4.26%
C The current yield on a stock is computed by dividing the annual dividend rate by the current market price. With EPS of $2.50 and a 40% payout ratio, the annual dividend is $1.00. This dollar divided by the current market price of $50.00 results in a current return of 2%.
Which of the following is NOT related to the variability of a portfolio's returns? A) Total return B) Asset allocation C) Market timing D) Security selection
A Let's analyze the question. A portfolio's future returns can vary, that is, fluctuate based on investment decisions made by the investor or adviser. The way the portfolio assets are allocated between different classes of securities will have an impact on the returns. The same is true with the timing of purchases or sales (buying stock when bad economic news is announced is probably not a good time). Finally, the specific securities selected will certainly impact the returns of the portfolio. That leaves total return. Total return is a measurement of the investor's past return on the portfolio. It measures what has happened and has no effect on future variability.
Dan is the owner of a mutual fund that returned him a before-tax return of 15% last year. Inflation is running at an annual rate of 3%, and Dan is in a 27% marginal income tax bracket. What has been Dan's approximate inflation-adjusted after-tax return on the fund over the course of the last year (rounded to the nearest 2 decimal points)? A) 7.95% B) 8.76% C) 12.00% D) 10.95%
A RETURN * TAX RATE THEN SUBTRACT INFLATION
An investment is made of $10,000. At the end of the year, $500 in nonqualifying dividends has been received and the value of the investment is $10,500. If the investor is in the 30% tax bracket, the after-tax yield is A) 3.5% B) 6.5% C) 5.0% D) 8.5%
A The only return (as far as yield is concerned) is the $500 of dividends. Remember, nonqualifying dividends do not "qualify" for the 15% rate. Subtracting 30% for taxes leaves $350 which, when divided by the $10,000 initial cost, is an after-tax yield of 3.5%. If the question had asked about total return, then the $500 unrealized profit would have been included, although there would have been no tax on it.
An investor purchases $10,000 of A-rated debentures in early January. At the end of the year, $500 in interest has been received and the value of the investment is $9,500. If the investor is in the 25% tax bracket, the after-tax yield is A)3.75%. B)5.0%. C)-1.25%. D)0.0%.
A The only return (as far as yield is concerned) is the $500 of interest. Subtracting 25% for taxes leaves $375 which, when divided by the $10,000 initial cost, is an after-tax yield of 3.75%. If the question had asked about total return, then the $500 unrealized loss would have been included, although there would have been no tax benefit to it because it is only a "paper" loss.
Risk-adjusted return is calculated by A) dividing the security's return in excess of the risk-free rate by its standard deviation B) dividing the price of the stock by the standard deviation C) multiplying the return of an investment by its standard deviation D) dividing the security's price by its beta
A The return from a security can be adjusted for the risk by dividing the security's return in excess of the risk-free rate by its standard deviation. This is the Sharpe ratio.
A hedge fund with a 2-plus-20% fee structure has equal probabilities of a 10% loss or a 30% gain in its first year. The probable return to an investor in the fund for the first year is closest to A)5.2%. B)-2.0%. C)17.6%. D)8.8%.
A To our knowledge, the exam has never asked a question this complicated. But, things can always change so we wanted you to get the "flavor" of combining probable return (which is tested) with hedge fund performance fees. With a 30% gain, the fund would earn fees of 2% + 0.20(30% - 2%) = 2% + 0.20 (28%) = 2% + 5.6% = 7.6%. With a 10% loss, the fund would only earn its management fee of 2%. To the investor, the expected return is 0.5(-10% - 2%) = 0.5 (-12%) = -6% + 0.5(30% - 7.6%) = -6% + 0.5 (22.4%) = -6% + 11.2% = 5.2%.
One year ago, ABC Widgets, Inc., funded an expansion to its manufacturing facilities by issuing a 20-year first mortgage bond. The bond is secured by the new building and land and is callable at par 15 years after the issue date. The bond was issued with a 5.5% coupon and is currently rated Aa. If the current market price of the bond is 105, A) the yield to call is lower than the yield to maturity. B) the yield to maturity is higher than the current yield. C) the nominal yield is lower than the current yield. D) the yield to call is higher than the current yield.
A When a bond is selling at a premium (105 means 105% of $1,000 or $1,050), the order, from highest to lowest yield is: nominal (coupon) yield, current yield, YTM, and YTC. If the bond is callable at a premium, the order could be changed, but it is highly unlikely that the exam will present that situation in a question.
In general, the favored way of measuring the performance of a money manager is by A) comparing her performance to that of the investor. B) comparing her performance to a relevant benchmark. C) examining the tax efficiency of the portfolio. D) measuring the fees charged against the total return.
B Although there are a number of ways of measuring a portfolio manager's performance, the most common one is to compare it to that of a benchmark portfolio or index that parallels the manager's style.
One of your clients is viewing a stock held in her portfolio and wishes to know how to calculate the holding period return for that security. In order to do that, she must know all of the following EXCEPT A) the dividends received during the holding period B) the date the stock was purchased and the date it was sold. C) the purchase price D) the current market price
B Holding period return is the total return on an investment over the period it was held. In order to compute this, one must know the income received (dividends) plus any capital appreciation (the difference between the purchase price and the sale price if sold, or current market price if still held). If you read the question carefully, it refers to a security "held" in her portfolio. Therefore, we don't have a sale date.
An investor buys a 5% AA-rated corporate bond at par. After 1 year, if his total return on the position is 4%, the most likely explanation for this is A) interest rates decreased causing the bond price to increase B) interest rates increased causing the bond price to decrease C) the bond rating was downgraded D) the investor paid accrued interest when he bought the bond diminishing his first year's return
B Total return is computed by adding together the income received plus any capital gain or loss. Because the bond is purchased at par, selling the bond at a loss is the only way the investor's total return could be less than the coupon rate. When interest rates go up, bond prices go down.
A customer purchases stock for $40 per share and holds it for 1 year, selling it for $50 per share exactly 12 months after the date of purchase. Four quarterly qualifying dividends of $.50 were paid during the year. If the customer's tax bracket is 30%, what is the after-tax rate of return? A) 17.5% B) 18.40% C) 21.75% D) 21%
C Divs are ST (15%) Cap Gains are LT (30%) The customer's return on the stock includes the $10 per share short-term capital gain ($50 − $40) plus the $2 qualifying dividend (quarterly dividend of $0.50 × 4). Remember, an asset must be held for more than 12 months for the gain to be long-term. After-tax rate of return is found by computing the total after-tax earnings. Short-term gains are taxed at the same rate as ordinary income, and qualifying dividends are taxed at a maximum rate of 15% (except for very high income earners—not tested). The tax on the $10 gain is $3 ($10 × 30%), and the tax on the $2 qualifying dividend is $0.30 ($2 × 15%). The investor's total return is the $12 total minus the $3.30 in taxes, or $8.70; $8.70 divided by the original investment of $40 results in an after-tax return of 21.75%.
If the return on Treasury bills is 3% and the equity risk premium is 4%, the expected equity returns should be A) 12% B) 4% C) 7% D) 1%
C The expected return on an equity investment is the risk-free (for example, T-bill) rate of return added to the equity risk premium (3% + 4% = 7%).
In order to compute a client's realized holding period return, it is not necessary to know A) the original investment B) income received during the holding period C) paper losses D) value at the end of the holding period
C The question is asking for realized return. That means that we ignore paper losses, (just another term for unrealized loss).
During your annual review with a client, you go over all the year's transactions. The beginning of the year balance in the account was $3,000. The client purchased 100 shares of ABC on February 1 at $30 per share and sold it on June 1 at $33 per share. During that period, ABC paid 1 quarterly dividend of $.30. The client used the proceeds of the ABC sale to purchase 66 shares of DEF on June 15 at $50 per share and sold it on December 15 at $60 per share. DEF pays quarterly dividends of $0.25 on the 1st of each month on a cycle beginning with February. Based on this information, you would inform the client that the account's total return is A)46% B)102.70% C)34.10% D)100%
C Total return in an account is computed by taking all income plus capital gains and dividing that by the original investment. In this example, the client received a $0.30 dividend on 100 shares ($30) and two $0.25 dividends (August 1 and November 1) on 66 shares ($33). Add that $63 of income to the gain of $300 on the first transaction, and $660 on the second, to come up with a total of $1,023 divided by $3,000, which equals a total return of 34.1%.
An investor purchases 100 shares of Kapco stock at $50 per share. At the time of the purchase, the stock is paying a quarterly dividend of $0.25. The dividend increases 5% each year over the next 5 years. The purchaser sells the 100 shares 5 years after purchase for $82 per share. What is the total return for the investor over the 5 years holding period? A) 74% B) 10% C) 75% D) 11%
C Total return includes capital appreciation plus income. The capital gain realized was $32 per share. The income was $1.00 per share (four quarterly dividends of $0.25) the 1st year, 5% higher the 2nd year ($1.05) and 5% higher each successive year. The total of the dividends received is $5.53. Adding that to the $32, we compute by dividing $37.53 by $50 resulting in a 75% total return.
An agent making a sales presentation to a client about a mutual fund's historical returns is required to explain to the client the difference between the fund's A) current yield and holding period return. B) current yield and real return. C) current yield and total return. D) total return and risk-adjusted return.
C When comparing to a benchmark, it is common to show various return computations. In connection with the solicitation of investment company shares, it is considered an unfair business practice to discuss returns without fully explaining the difference between current yield and total return.
A client approaches the IAR handling the advisory account with a request to find a preferred stock that will offer a 6% income return. The IAR suggests a stock paying a $.28 quarterly dividend. That stock will meet the income objective if it has a current market price of A) $11.91 B) $6.72 C) $4.67 D) $18.67
D The first thing to do is annualize the dividend by multiplying the $0.28 by 4. Once we have the annual dividend of $1.12, divide by 6% and the result is $18.6666 or $18.67 properly rounded. If you left your math skills at home, all you have to do is multiply each of the 4 choices by 6% to see which one is closest to $1.12.
Denise is an expert in retirement planning working with a client to estimate the client's inflation-adjusted retirement funding. If in today's terms, the annual retirement income needed by the client is $15,000. What would be the approximate amount required after three years, given an inflation rate of 4%? A) $19,567 B) $14,768 C) $11,456 D) $16,872
D This is simply a compound interest calculation: $15,000 × 1.04^3= $16,872. Enter $15,000 into the calculator and multiply by 104% three times in a row. Of course, there is always a short-cut. The needs increase by 4% each year. Without compounding, that is $600 per year ($15,000 x 4% = $600). Three years at $600 per year is a total of $1,800 additional needed. That brings the client's needs to $16,800. That doesn't include the compounding so the answer will be slightly higher (and that always works on the exam).
What is the total return on a 1-year, newly issued (365 days to maturity) zero-coupon bond priced at 950? A) The return cannot be determined without knowing current interest rates B) 5.26% plus the implied coupon rate C) 5.00% D) 5.26%
D To determine the total return on this zero-coupon bond, the $50 capital appreciation is divided by the cost of the bond (in this case, $50 divided by $950 equals a total return of 5.26%). Total return of a zero-coupon bond is made up entirely of the difference between the cost of the bond and the sale or maturity price of the bond.
When, as per the Sharpe ratio, a stock exhibits superior performance, it implies A) a low beta. B) a positive alpha. C) a negative alpha. D) a high beta.
B
Which of the following is generally believed to present a more accurate picture of a portfolio manager's performance? A) Net present value B) Time-weighted return C) Dollar-weighted return D) Real rate of return
B
Which of the following statements regarding the Sharpe ratio is most accurate? A) It is not a risk-adjusted metric. B) It measures the portfolio's return over and above the risk-free rate divided by the standard deviation of the portfolio's returns. C) It measures the portfolio's return over and above the 10-year corporate bonds rate. D) The lower the Sharpe ratio, the better the risk-return tradeoff.
B
A portfolio manager whose universe of stocks is those with market caps of $4 - $6 billion would most likely be graded against A) Nasdaq 100. B) S&P 400. C) Dow Jones Composite Average. D) S&P 500.
B
A stock is currently worth $75. If the stock was purchased one year ago for $60, and the stock paid a $1.50 dividend over the course of the year, what is the holding period return? A) 25.0% B) 27.5% C) 22.0% D) 24.0%
B
An analyst estimates that a stock has a 40% chance of earning 10%, a 40% chance of earning 12.5%, and a 20% chance of earning 31%. What is the probable return of this stock? A) 7.58% B) 15.20% C) 13.00% D) 14.17%
B
An investor is reviewing his portfolio. To compute the real rate of return on an investment, it would be necessary to know all of the following EXCEPT A) the income received from holding the asset B) the tax bracket of the investor C) the gain (or loss) recognized on the asset D) the rate of inflation
B
If GHI currently has earnings of $3 and pays an annual dividend of $1.75 and GHI's market price is $35, the current yield is A) 3% B) 5% C) 1.75% D) 8.6%
B
If a client in the 30% marginal income tax bracket can earn an after-tax rate of return of 7% when the estimated inflation rate during the holding period of an investment is 4%, the client's real rate of return is A) 10% B) less than 7% C) 7% D) more than 7%
B
If an investor buys a utility stock with a stable 5% dividend, and after a year the investor's total return in the stock is 10%, the most likely reason for this is A) the investor reinvested the quarterly dividends B) the stock appreciated by 5% C) the company doubled its dividend payment D) the stock price declined
B
In order to compute an investor's after-tax return on a corporate bond, all of the following are necessary EXCEPT A) marginal tax bracket B) inflation rate C) interest payments D) appreciation
B
In order to compute the real rate of return on a specific stock, all of the following information is required EXCEPT A) capital gain or loss. B) the stock's beta. C) the change to the CPI. D) any dividends paid.
B
The Sharpe ratio is the average annual return of a security A) plus the risk-free rate divided by the security's beta B) minus the risk-free rate for the period divided by the security's standard deviation C) divided by the expected return of the market D) divided by the risk-free rate
B
The holding period return (HPR) on a share of stock is equal to A) the capital appreciation minus the inflation rate over the period B) the capital appreciation plus the dividend income received over the period C) the current yield plus the dividend yield D) the dividend yield plus the risk premium
B
A company with 20 million shares outstanding paid $36 million in dividends. If the current market value of the company's shares is $36, the current yield is A) not determinable from the information given B) 2% C) 5% D) 10%
C
Which of the following is a method for determining the internal rate of return to an investor based on cash flow in and out of the portfolio? A) Discounted cash flow B) Time-weighted return C) Dollar cost averaging D) Dollar-weighted return
D
Which of the following statements accurately captures the significance of the Sharpe ratio? A) It measures the degree to which the fund's performance can be attributed to the index against which it is benchmarked. B) Its use is limited to portfolios rather than individual securities. C) It measures the dispersion of the fund's returns over a period of years. D) The higher the Sharpe ratio is, the better the risk-adjusted performance of the portfolio.
D
A company has paid a dividend every quarter for the past 20 years. If the stock's price has fallen dramatically over the past quarter, but the dividend has remained the same, it may be concluded that A) current dividend yield has remained the same B) current dividend yield has decreased C) dividend yield to maturity has decreased D) current dividend yield has increased
D
An investor purchases a 5% callable convertible subordinated debenture at par. Exactly one year later, the bond is called at $104. The investor's total return is A) 7.5%. B) 4%. C) 5%. D) 9%.
D
If the Consumer Price Index (CPI) rose 5% during the past year, during which time your client held a 6% bond, what would be the approximate annualized inflation-adjusted return? A) 6% B) 0% C) 5% D) 1%
D
One element of the formula used to compute the Sharpe ratio is A) beta B) net present value C) alpha D) standard deviation
D
Which two of the following statements are CORRECT? Time-weighted returns are generally of more use than dollar-weighted returns to evaluate portfolio manager performance. Time-weighted returns are generally of more use than dollar-weighted returns to evaluate individual investor performance. Dollar-weighted returns are generally of more use than time-weighted returns to evaluate portfolio manager performance. Dollar-weighted returns are generally of more use than time-weighted returns to evaluate individual investor performance.
1, 4
ABC Corporation's 5% mortgage bond is currently trading at a premium. The bond is callable at par in 10 years and matures in 15 years. When comparing the returns available to an investor, it would be accurate to state A) the yield to maturity is higher than the yield to call. B) the yield to maturity is higher than the current yield. C) the current yield is higher than the nominal yield. D) the yield to call is higher than the current yield.
A
An investor purchases 100 shares of RIF common stock. In the year following the purchase, the RIF shares appreciated by 12% and paid a 2% dividend. If inflation, as measured by the CPI, was at a 4% rate, the investor's total return on the RIF shares is closest to A) 14% B) 12% C) 8% D) 10%
A
The minimum rate of return that a reasonable investor will accept to acquire an investment (required rate of return) is generally determined by A) the Federal Reserve Board (FRB) through its open-market operations B) the current risk-free rate of return plus the risk premium C) the investor's marginal federal income tax bracket D) the investor's previous investment experience
B
This is the performance of your portfolio over the previous 4 years: Year 1 - 10% Year 2 - 45% Year 3 + 20% Year 4 + 35% In order for the portfolio to be equal to the starting investment, the return in Year 5 must be nearest to A)0%. B)25%. C)33%. D)20%.
B
An investor invests $1,000 into the shares of the Stratford Growth and Income Fund, an open-end investment company registered under the Investment Company Act of 1940. On the purchase application, the investor checked the boxes signifying that dividends were to be paid out in cash and capital gains were to be reinvested. During year, the fund pays dividends of $20 and distributes a $250 capital gain. At the end of the year, the fund's value is $1,300. The total return to this investor was A) 25% B) 27% C) 32% D) 30%
C
An investor is of the opinion that the recent bull market has run its course, and she wants to protect her portfolio consisting largely of equities with a market cap of less than $1 billion. Her best choice would be to A) sell puts on the S&P 500. B) sell futures on the Russell 2000. C) buy puts on the Russell 2000. D) buy puts on the S&P 500.
C
If you knew a given stock had a 40% chance of earning a 10% return, a 40% chance of earning 20%, and a 20% chance of earning −10%, the stock would have A) a total return of 10% B) an annualized return of 10% C) a real rate of return of 10% D) an expected rate of return of 10%
D
The true rate of return on a bond is the nominal rate minus A) the prime rate B) the discount rate C) the margin rate D) the inflation rate
D
A company currently has earnings of $4 and pays a $0.50 quarterly dividend. If the market price is $40, what is the current yield? A)1.25% B)15% C)10% D)5%
D The quarterly dividend is $0.50, so the annual dividend is $2.00; $2 ÷ $40 (market price) = 5% annual yield (current yield).
