SIE: Analysis (Market Analysis)

Spot trades of foreign currencies settle:

1 or 2 business days after trade date Spot trades of foreign currencies settle in either 1 or 2 business days after trade date. Trades of the more actively traded currencies settle in 1 day; trades of the less frequently traded currencies settle in 2 days.

Trading in the Interbank market will affect all of the following directly EXCEPT:

American Depositary Receipt prices in terms of U.S. dollars Foreign currencies trade in the "Interbank" market. If the dollar declines against foreign currencies, U.S. goods become cheaper to foreigners. This will stimulate exports and domestic economic growth. If the dollar rises against foreign currencies, foreign goods become cheaper in the U.S. This will stimulate imports, and shift production out of the U.S. to other countries. American Depositary Receipts are vehicles for foreign securities to be traded in the United States. ADRs are only traded in the United States, and are denominated in U.S. dollars, so there is no direct effect of foreign currency price movements on ADR prices (though an argument can be made that the foreign stock held in trust pays dividends in the foreign currency; and that these dividends are converted to U.S. dollars to be paid to ADR holders; that currency price movements have some impact on ADR values).

Which action would NOT help a client diversify his or her portfolio?

Buying stocks in a portfolio in accounts held at different broker-dealers Will diversify: Buying bonds in a portfolio that have different credit ratings Buying an index fund that invests solely in domestic securities and another index fund that invests solely in foreign securities Buying a target date mutual fund based on the customer's investment objectives and investment time horizon Diversification takes many forms to offset investment risks - one can diversify into different asset classes, can diversify by geographic regions, can diversify bond holdings by maturity and/or credit quality, etc. Buying holdings at different broker-dealers does nothing to diversify a portfolio. A target date fund allows the customer to set up a target date when the money will be needed, and the fund manager will then allocate investments in early years to growth equities, shifting to a safer mix (stocks/bonds) as the years progress, and finally shifting the asset mix to mainly money market instruments as the cash is needed. Thus, it gives both diversification and portfolio reallocation as the years progress to fulfill the customer's investment objective.

Which action would NOT help a client diversify his or her portfolio?

Buying stocks of companies on different exchanges Will diversify: Buying stocks of companies with different customer profiles Buying stocks of companies located in different geographic region Buying stocks of companies in different industries Diversification takes many forms to offset investment risks. When investing in stocks, buying companies in different geographic regions helps diversification, because they each region has different economic growth characteristics. Of course, buying companies in different industries helps diversification, and buying companies that have different customers helps diversification (for example, one company might be a government contractor, another might be a seller of retail items, another might build high end real estate - and the customers for all of these are different). The same company can trade on different exchanges (it might trade on both the NYSE and NASDAQ, as an example). Making the purchase in a specific market does nothing to affect diversification.

Which index is the narrowest measure of the market?

Dow Jones Industrial Average The Dow Jones Industrial Average consists of 30 stocks (principally NYSE listed issues). This is the narrowest measure of the market. The Value Line Index is broader, including 1,700 issues. The NYSE Composite Index consists of the approximately 2,500 issues listed on the NYSE. The Wilshire Index is the broadest measure since it includes about 3,500 issues of companies headquartered in the United States that are listed on the NYSE, NYSE American (AMEX), or NASDAQ. The Wilshire started at 5,000 stocks in 1974 but the number of listed companies in the U.S. has been declining over the years, mainly because of the high regulatory cost of a company "going public."

Which of the following indexes is the narrowest measure of the market?

Dow Jones Industrial Average The Dow Jones Industrial Average has 30 stocks, while the Dow Jones Averages contain 65 stocks - 30 industrials; 20 transportations; and 15 utilities. The Wilshire Index is the broadest measure since it includes about 3,500 issues of companies headquartered in the United States that are listed on the NYSE, NYSE American (AMEX), or NASDAQ. The Wilshire started at 5,000 stocks in 1974 but the number of listed companies in the U.S. has been declining over the years, mainly because of the high regulatory cost of a company "going public." The Value Line Index includes 1,700 issues.

Which stock market index is made up of 30 large capitalization companies?

Dow Jones Industrial Average The Dow Jones Industrial Average only consists of 30 large cap companies. The Standard and Poor's Index that is most widely quoted is the "500" index - the 500 largest companies by market capitalization headquartered in the United States. The Value Line Index consists of 1700 widely-followed companies, spread between NYSE, AMEX, and NASDAQ. The Russell Index consists of 2000 small capitalization companies.

Foreign exchange rates are set in which market?

Interbank Market Trading of foreign currencies occurs in the Interbank Market. This is an institutional market trading very large units of currency from money-center bank to money-center bank.

Speculators in foreign currencies would be subject to all of the following risks EXCEPT:

Reinvestment risk only affects securities that pay an income stream. If interest rates fall over the time period that an investment is held; any dividends or interest payments received over this time period are reinvested at lower rates, lowering the overall rate of return. This risk would not affect foreign currencies, which do not give investors an income stream. Speculators in foreign currencies are simply placing bets on the future value of that currency. They assume political risk, exchange rate risk, and market risk. Market risk in this case is simply the risk of being on the wrong "side" of the market - e.g., being long the currency only to have its value fall; or short the currency only to have its value rise.

An investor has purchased shares of an international bond fund. Which statement is TRUE?

The fund will have superior performance if the value of the foreign currency increases An international bond fund will have securities that are denominated in foreign currencies. If the foreign currency value rises against the dollar, then when the fund's NAV is converted into dollars, proportionately more dollars will be created, since each unit of foreign currency buys more dollars. This would result in superior performance from the U.S. investor's point of view. Remember, just because an investment is dollar- denominated, investors can't assume the holding is immune from currency swings.

All of the following economic events would have a positive long term impact on common stock prices EXCEPT:

Rising inflation rates Falling interest rates are good for stock prices. More investors will switch from low yielding bonds to stock investments. A falling capital gains tax rate also makes stocks attractive to investors. Rising employment indicates that the economy is expanding. This is bullish for corporate profits and hence, stock prices. Rising inflation means that interest rates are likely to rise. This makes long term debt unattractive due to their greater price volatility in response to market interest rate changes and also makes stocks unattractive since corporations are not able to increase prices in line with rising costs, hurting profits. In inflationary times, investors switch from stocks and long term bonds to money market instruments which are paying current high rates of interest; and "hard" assets such as gold and real estate that tend to keep up with inflation.

Which of the following indexes is the broadest measure of the market?

Wilshire Index The Wilshire Index is the broadest measure since it includes about 3,500 issues of companies headquartered in the United States that are listed on the NYSE, NYSE American (AMEX), or NASDAQ. The Wilshire started at 5,000 stocks in 1974 but the number of listed companies in the U.S. has been declining over the years, mainly because of the high regulatory cost of a company "going public." The Value Line Index only includes 1,700 issues. The Standard and Poor's Composite Index has 500 stocks, while the NYSE Composite includes all common issues listed on the NYSE - currently about 2,500 issues.

If the United States balance of payments goes from a deficit to a surplus position, the value of the U.S. dollar should:

appreciate If the United States exports more to foreign countries than is imported, then there is a balance of payments surplus. To pay for their purchases, foreigners must sell their currency and buy the U.S. dollar (since payment for purchases in the U.S. is made in dollars). Thus, the value of the U.S. dollar will rise.

NYSE MARKET DIARY Yesterday Prev. Day Advanced 577 827 Declined 1963 1757 Unchanged 455 388 Total Issues 2995 2972 New Highs 10 13 New Lows 91 78 Based on the information presented for both days, a technical analyst would conclude that the market:

breadth indicates a strong bearish trend Declines sharply outnumbered advances on both days, with many new low prices being set. Thus, the breadth of the market indicates a strong bearish (downward) trend.

An investment strategy that apportions investments into different types of securities with different risk/return characteristics is called:

diversification The question defines diversification - by adding a selection of investments to a portfolio with different risk/return characteristics, overall risk is reduced.

Foreign currency values are affected by all of the following EXCEPT:

fixed exchange rates Fixed exchange rates have no effect on foreign currency values There is no market mechanism for adjusting the value of a currency with a fixed exchange rate - resulting in "black markets" for the currency. Currency values are affected by currency devaluation imposed by Governments; by central bank intervention directing the buying or selling of that currency; and by floating exchange rates. A floating exchange rate is one that changes in response to market conditions. All major Western currencies have floating exchange rates.

If the dollar falls against foreign currencies, all of the following statements are true EXCEPT:

foreign currencies buy fewer dollars If the dollar falls, U.S. goods become cheaper to foreigners and foreign goods become more expensive in the U.S. Thus, exports are likely to rise and imports are likely to fall. Since the dollar is cheaper, foreign currencies buy more dollars and/or goods.

A U.S. balance of payments deficit would be widened by all of the following EXCEPT:

increased levels of foreign tourists visiting the United States If the balance of payments is running a deficit, then more U.S. Dollars are being spent abroad for foreign goods and services than are being spent in the United States by foreigners for domestic goods and services. Increased levels of U.S. imports will cause more dollars to leave the U.S., widening the deficit. Increased levels of foreign tourists visiting the U.S. will narrow the deficit, since dollars are being spent in the U.S. by more foreigners. Increased dividends paid to foreign holders of U.S. securities will cause dollars to leave the U.S., widening the deficit. Decreased sales of U.S. securities to foreign holders will reduce the inflow of dollars resulting from these purchases, widening the balance of payments deficit.

All of the following statements are true about the interbank market EXCEPT the market:

is located in New York City The interbank market trades foreign currencies across the globe, 24 hours a day. The market is unregulated and responds to central bank buying and selling of currencies.

A foreign government wishes to stabilize its currency, which has been falling against the U.S. Dollar. The government would:

sell U.S. Dollars and buy the foreign currency To stabilize a currency that is falling against the dollar, the foreign government would buy the foreign currency (driving its price up against the U.S. Dollar); and sell the U.S. Dollar (driving its price down against the foreign currency).

The Standard and Poor's Composite Average is most affected by price changes in:

technology stocks The S&P 500 Index was "recategorized" about 15 years ago into different sectors to allow the creation of "Sector SPDRs" - index funds based on these sectors. The new breakdown, by approximate size, is: Technology 24% Financials 15% Healthcare 14% Consumer Discretionary 12% Industrials 10% Consumer Staples 9% Energy 6% Utilities 3% Materials 3% Real Estate 3% Telecoms 2% By far the largest weighting in the revised sector breakdown is technology stocks.