Unit 12

Your 50-year-old client has just inherited $50,000 from a relative and whites to invest it into a single payment deferred variable annuity. What computation would be used to approximate the value of the account when the client reaches 70? A. future value B. present value C. net present value D. internal rate of return

A. This is what the future value computation is used for. We take the sum of money available now, consider the time the money will be invested, estimate a rate of return, and arrive at the expected value (assuming the earnings are equal to the estimated rate).

An investor is looking at the past performance of a security over the past three years. In year one, it returned 10%; year two it returned 15%; and year three it returned -4%. This computer to an average rate of return of 7%. This would be properly referred to as the A. arithmetic mean B. internal rate of return C. median return D. range

A. When a true average return is shown that is the arithmetic mean. the median (the number in the middle of the group of three) is 10%, and the range is 19% (-4 to +15).

Present value is a computation that is frequently used to determine the amount of a deposit needed now to meet a future need, such as a college education. If an investor uses an expected return of 8% but the actual return over the period is 10%, the future value will be A. lower than anticipated B. higher than anticipated C. the same as anticipated D. too varying to tell

B. Present value is the amount deposited to meet a future goal base on an expected rate of return. If the return is higher than expected, the ending result will be greater (a good thing).

A customer purchased 100 shares of SNP at $38. At the time of purchase the PE ratios was 12. Approximately what are the earnings per share of SNP? A. $12.00 B. $3.20 C. $3.80 D. $1.20

B. The PE ratio is a comparison the current market price at the close to the earnings of the company; $38 (CMV) / 12 (PE ratio) = $3.16 (approximate EPS)

RMBN common stock is currently selling for $60, which gives the stock a p/e ratio of 20:1. Based on that information, the earnings per share are A. $2.00 B. $3.00 C. $5.00 D. $20.00

B. The price-to-earnings ratio compares the market price to the earnings per share of common. What this question is telling us is that the $60 price is 20 times the EPS. Divide $60 by 20 and we arrive at $3.00 per share.

One of the valuation ratios used y fundamental analysts is the price/earnings ratio. The P/E ratio is the current market price of the stock divided by the A. book value per share B. dividends per share C. earnings per share D. investor's cost basis per share.

C. An analyst will computer the P/E ratio by taking the current market price per share and dividing it by the earnings per share.

Over a specified time period, the S&P 500 has returned 18%. The manager of a conservative growth portfolio with a beta of .8 reports a return of 16% for the same Tim period. Assuming a risk-free rate of 4%, the managed pro folio's alpha was A. -2.0 B. -1.6 C. +0.8 D. +2.0

C. The formula is (portfolio return - RF rate) - (beta * (market return - RF rate)). Pluggin in the number, we have 16% - 4% = 12. Then .8 * (18%-4%) or .8 * 14%, which equals 11.2%. The final step is 12 - 11.2 giving us a positive .8. Using these numbers, some find it easer to compare 80% of market return (after removing the risk-free rate) to the actual return, once again, after the RF rate. In this case, it would be 80% of 14 (that is 11.2) compared to 12 (16%-4%). We get the same alpha of .8 this way as well.

An investment of $1,000 made 10 years ago is now worth $4,000. using the rule of 72, the approximate compounded annual rate of return is A. 40% B. 7.2 % C. 14.4% D. 25%

C. This investment has quadrupled in 10 years. Using the rule of 72, we know how to computer the rate of return when an investment doubles. This one has doubled every 5 years. Dividing 72 by 5 gives us an approximate rate of 14.4%

One of your clients has a portfolio that has a correlation of .91 wit the overall market. a stock with which correlation coefficient would most likely offer the greater diversification to this client? A. .91 B. .51 C. .01 D. -.51

D. Adding securities with a negative correlation tends to increase the diversification of a portfolio.

Over the past five years, an investor's portfolio has shown returns of 6%, 4%, 11%, 10%, and 4%. Which of the following statements is correct? I. The mean return is 7% II. the median return is 6% III. the mode is 4% IV. the range is 7% A. III and IV B. I, II and III C. I and II D. I, II, III and IV

D. The mean is the average return. Add these five numbers together and the total is 35% over a five-year period. That is an average (or mean) return of 7% (35 divided by 5). The median is the return that has as many above as below, and in this case, would be 6% (4, 4 below and 10, 11 above). The mode is the return that appears the most often and, with two of the five at 4%, that is the mode. The range is the difference between the highest and lowest returns. in this case, from the high of 11% to the Lowe of 4% is a range of 7%