Progress Exam 4B
Which TWO of the following types of insurance have fixed premiums? I) Whole life insurance II) Universal life insurance III) Variable life insurance IV) Variable universal life insurance A) I and II B) I and III C) II and IV D) III and IV
B) I and III **Universal life policies, including variable universal life, have flexible premiums. Variable universal life is sometimes called flexible-premium variable life insurance. Whole life and variable life insurance policies have fixed premiums.**
A loss from a limited partnership's operations is passed through to a limited partner. On the limited partner's personal tax return, this loss: A) Is fully deductible against the individual's income from all sources B) Is considered a passive loss and may only be deducted against passive income C) May only be deducted with the permission of the general partner D) Is only deductible when the individual sells the partnership interest
B) Is considered a passive loss and may only be deducted against passive income **A limited partnership interest is considered to be a passive activity because limited partners do not materially participate in the operations of the business. Therefore, the losses passed through to limited partners are considered passive and may only be offset against passive income. Choice (d) is incorrect because it states that passive losses are deductible only when the individual sells the partnership interest.**
A corporation has the following financial information. $1 million in cash $2 million in accounts receivable $5 million of inventory $10 million of equipment $3 million in short-term debt $50 million in long-term debt $2 million accounts payable What is the corporation's current ratio? A) 1.6 B) 2 C) 2.6 D) 3.6
A) 1.6 **The current ratio is found by dividing the current assets by the current liabilities. In this question, current assets include cash, accounts receivables, and inventory, totaling $8 million. Current liabilities include short-term debt and accounts payable, totaling $5 million. The current ratio is $8 million / $5 million, or 1.6.**
For a single parent who has a low income and wants to protect her child in the event of her death, what's the best policy? A) Term life B) Variable annuity C) Variable life D) Whole life
A) Term life **Since term life insurance policies don't accumulate cash value, they have the lowest premiums and are likely the most suitable policies for investors with low income. In this question, it's doubtful that the single parent has enough discretionary income to afford the higher premium that's associated with a permanent insurance policy. **
XYZ Corporation's common stock has the same beta as ABC Company's common stock. However, XYZ stock, on the average, produces better returns than ABC. Which of the following would explain this difference? A) XYZ stock has a higher alpha than ABC stock. B) ABC stock is more liquid than XYZ stock. C) XYZ Corporation is more highly leveraged than ABC Company. D) ABC Company has a smaller market capitalization than XYZ Corporation.
A) XYZ stock has a higher alpha than ABC stock. **While a stock's beta measures its performance as it relates to the overall market, alpha measures that part of a stock's return that is independent of the market. It is influenced by factors that are unique to that company and its industry group.**
An investment adviser determined that XYZ stock has the following potential future returns. There is a 20% chance that in a bull market, XYZ stock will return 15%. In a flat market (60% probability), the return should be 2%. The likelihood of a bear market is 20%, and expected returns would be a loss of 5%. What is the expected return for XYZ stock? A) 1.20% B) 3% C) 3.20% D) 12%
C) 3.20% **According to modern portfolio theory, the expected return is the sum of the weighted average of an investment's return. To find each weighted return, multiply the return by the likelihood of that return. For XYZ stock, the expected return is as follows: Return Likelihood Weighted Return 15% x 20% = 3% 2% x 60% = 1.2% (5%) x 20% = (1%) Expected return = 3.2% or (3% + 1.2% - 1%)
The NAV of an ETF is calculated: A) Throughout the day B) At the open of each trading day C) At the close of each trading day D) Quarterly
C) At the close of each trading day **Although exchange-traded funds (ETFs) are bought and sold on registered stock exchanges, they also have a net asset value (NAV) that's similar to mutual funds. For an ETF, the NAV is typically calculated at the close of exchange trading. However, investors don't necessarily buy and/or sell their ETF shares at the NAV; instead, they trade their ETF shares at market prices that are based on supply and demand.**
When calculating a fixed-income security's discounted cash flow, which of the following statements is TRUE? A) A bond trading at a discount to its discounted cash flow value is overvalued. B) A bond trading at a premium to its discounted cash flow value is undervalued. C) Discounted cash flow calculations can determine fair market values for a fixed-income security. D) Discounted cash flow ignores current interest rates of comparably priced bonds.
C) Discounted cash flow calculations can determine fair market values for a fixed-income security. **Discounted cash flow analysis is a way of estimating the fair market value of an investment based on its projected cash flows. If the market price of a bond is trading at a price greater than the value predicted based on the discounted cash flow calculation, it is overvalued. If the market price of a bond is trading at a price less than predicted by DCF, then it is undervalued. The DCF calculation takes into consideration the current interest rates found in the market for bonds of similar maturities and risk.**
Portfolio % Stocks % Bonds Expected Return Beta Standard Deviation A 20 80 5% .65 6 B 30 70 7.5% .75 12 C 85 15 8.5% 1.05 20 D 80 20 10% 1.10 15 Which portfolio would be considered the MOST volatile? A) Portfolio A B) Portfolio B C) Portfolio C D) Portfolio D
C) Portfolio C **Standard deviation is a measure of the variability (or volatility), of expected returns. The greater the standard deviation, the greater the range of expected returns and risk. When considering expected returns, stocks compared to bonds tend to be more volatile. Since Portfolio C contains the greater percentage of stocks, it would be expected to have a higher standard deviation.**
Those investors, who believe markets are perfectly efficient, may use a passive strategy in which the asset mix of a portfolio is altered on a periodic basis. This strategic asset allocation approach is known as: A) Tactical asset allocation B) Sector rotation C) Systematic rebalancing D) Buy-and-hold
C) Systematic rebalancing **Systematic rebalancing is a passive or strategic asset allocation strategy that advocates rebalancing a portfolio on a periodic basis. Tactical asset allocation is used to identify and buy into sectors that are anticipated to outperform the market. As the assets change in value, the portfolio may then be rebalanced frequently in anticipation of market events. A buy-and-hold strategy is a passive approach that doesn't rebalance an investor's portfolio.**
In the formula Pn = P0(1 + r)n, Pn represents: A) The standard deviation B) One million dollars in U.S. currency C) The future value of money D) Excess returns
C) The future value of money **The formula Pn = P0(1 + r)n is used to calculate the future value of money. In other words, Pn is the amount that an investment will be worth at some point in the future, taking the effects of compounding into consideration. P0 is the original investment (at Year 0), n represents the number of compounding periods, and r equals the rate of interest.**
Under which of the following circumstances will the payout from a variable annuity increase? A) The rate of inflation exceeds the AIR. B) The performance of the separate account exceeds the rate of inflation. C) The performance of the separate account exceeds the AIR. D) The performance of the separate account for the current period exceeds the performance of the separate account for the previous period.
C) The performance of the separate account exceeds the AIR. **Whether the payment from a variable annuity changes depends on the relationship between the performance of the separate account and the assumed interest rate (AIR) in the contract. If the account performance exceeds the AIR, the payment will be greater than the last payment. If the account performance equals the AIR, the payment will be unchanged from the last payment. If the account performance is less than the AIR, the payment will decline from the last payment.**
The separate account of the variable life policy that Tom Jones bought is performing poorly. Does this have any influence on his death benefit? A) No, the death benefit is fixed over the life of the contract. B) Yes, but it could never drop below the highest death benefit attained during the time that the contract began building cash value. C) Yes, but it could never drop below the fixed minimum. D) No, the cash value can only increase over the life of the contract.
C) Yes, but it could never drop below the fixed minimum. **If the performance of the separate account of a variable life insurance policy is less than the Assumed Interest Rate (AIR), the death benefit will decline. However, the death benefit can never drop below the face value of the policy.**
A client invested $100,000 in an Equity Indexed Annuity. The participation rate is 90% with a cap rate of 15%. In year one, the index increased by 20%. In year two, the index lost 5%. In year three, the index gained 10%. What is the value of the annuity after year three? A) $118,000 B) $115,000 C) $135,700 D) $125,350
D) $125,350 **An Equity Indexed Annuity is credited with the lesser of the participation rate or the cap rate, based on the performance of an index such as the S&P 500. In year one, the index increased by 20%. 90% of the gain is equal to 18%, but since the annuity can't be credited with more than the cap of 15%, the value of the annuity would be $115,000 (1.15 X $100,000). Many Equity Indexed Annuities have a floor of zero, thus a negative return in the index will not cause the value of the annuity to decline. Therefore, in year two, the value of the annuity would remain the same. In year three, the index increased by 10%. 90% of the gain is 9%, which is less than the cap rate, so the annuity would be credited with 9%, or $125,350 (1.09 X $115,000).**
A cash forward contract is different than a futures contract because the cash forward contract is: I) A personal transaction between the buyer and the seller II) Not for a standard amount of the commodity, but rather is for a specific amount and quality of the cash commodity III) Not negotiated by open outcry in the trading pits and is not subject to the rules of a futures exchange A) I only B) I and II only C) II and III only D) I, II, and III
D) I, II, and III **A cash forward contract is a personal transaction for a specific amount and quality of the cash commodity and is not subject to the rules of a futures exchange.**
Which of the following statements are NOT TRUE regarding a comparison of strategic versus tactical asset allocation? A) Strategic asset allocation focuses on the client's investment objectives and risk tolerance, while tactical asset allocation focuses on economic and market conditions. B) Strategic asset allocation has a long-term outlook, while tactical asset allocation encompasses short-term decisions. C) Unlike strategic asset allocators, tactical asset allocators believe that investors can time the market. D) None of the above
D) None of the above **Asset allocation based on a client's risk tolerance and investment objectives is called strategic asset allocation. In theory, it is the best mix of assets, given the client's goals and level of risk aversion, giving it a long-term outlook. Strategic asset allocators tend to view the market as efficient and market timing as ineffective. By contrast, those who believe securities markets are not perfectly efficient may try to use an active strategy to alter the portfolio's asset mix, to take advantage of anticipated economic events. This market timing approach is sometimes called tactical asset allocation.**
A client has $20,000 to invest, a 10-year time horizon, and a desire to have $50,000 at the end of the investment period. The rate of return that must be earned to arrive at $50,000 is called the: A) Expected return B) Internal rate of return C) Current yield D) Future return
The rate of return that a sum P0 (present value) must earn over n periods to produce a final (future) value of Pn is the internal rate of return. It is represented by the quantity r in the basic time value of money equation: Pn = P0(1 + r)^n A calculator is normally used to calculate the internal rate of return, since it is difficult to compute manually.
