Series 65 - Unit 21 Quiz #1

Which of the following strategies would most effectively protect an investor with a short stock position? A) Sell a put B) Buy a call C) Sell a call D) Buy a put

B. Buy a call

Buying stocks with high P/E ratios normally reflects which of the following investment styles? A) Special situations B) Growth C) Value D) Turnaround

B. Growth

Which of the following is the form of portfolio management that rotates between sectors based on changes to the business cycle? A) Tactical portfolio management B) Segment rotation C) Strategic portfolio management D) Cyclical rotation

B. Segment rotation Segment rotation, more commonly known as sector rotation, involves altering portfolio composition based on which sectors are poised to outperform as the business cycle is changing phases.

While managing a client's portfolio, an investment adviser representative attempts to take advantage of perceived market inefficiencies. The IAR is not concerned with the client's long-term goals; rather, the interest lies in continuously changing the investment mix in an attempt to take advantage of overall investor sentiment. Based on this information, what type of portfolio management style is the investment adviser representative using to manage the client's money? A) Portfolio ratio analysis B) Tactical asset allocation C) Buy-and-hold D) Strategic asset allocation

B. Tactical asset allocation

Which form of the efficient market hypothesis (EMH) suggests that fundamental analysis and insider information may produce above-market returns? A) Semi-weak B) Weak C) Strong D) Semi-strong

B. Weak

An investor diversifying a corporate bond portfolio does not consider A) maturity B) domicile of the investor C) quality D) issuer

B. domicile of the investor

To a technical analyst, the resistance level signifies the price at which a stock's supply would be expected to A) cause the stock price to "break out". B) increase substantially. C) remain constant. D) decrease substantially.

B. increase substantially. Explanation: Think of supply as the amount available for sale. Supply would increase near the resistance level as people try to sell when the price is high.

In general, the most passive investment style for a portfolio would be A) contrarian. B) indexing. C) buy and hold. D) value.

B. indexing. Explanation This is a close call between indexing and buy and hold. We believe that the NASAA philosophy on this would be that buy and hold does require some management after the portfolio is set up. That is, some companies go out of business or are merged into other entities or go private and that requires making new decisions. The same can happen with the companies in an index, but the investor doesn't have to make the changes. When you invest in an index, it is sort of like (with credit to Ron Popeil) "set it and forget it". Clearly, the other two choices are not passive in the same way. LO 21.e

If the risk-free rate of return is 3.5%, the expected market return is 9.5%, and the beta of a stock is 1.3, what is the required return on the stock according to the capital asset pricing model? A) 8.85% B) 12.35% C) 11.30% D) 7.80%

C. 11.30% ([MR - RF] x beta) + RF ([ 9.5% - 3.5%] x 1.3) + 3.5% (6% x 1.3) + 3.5% 7.8 + 3.5% 11.3% Key: MR - Market Return RF - Risk free rate

An investor has $50,000 to invest in bonds. Currently, 10-year bonds are offering very attractive yields, but the client is concerned that in a few years, rates will be even higher. What would you suggest? A) Laddering B) Diversifying C) Barbell strategy D) Bullet strategy

C. Barbell strategy Explanation With the barbell strategy, the investor would place $25,000 into bonds maturing in 10 years and the other half into bonds maturing in two years. This makes $25,000 available for reinvestment in two years enabling the investor to take advantage of the higher rates (if they materialize). LO 21.f

Which of the following securities would most likely be included in the portfolio of a mid-cap manager? ABC, $12 per share, 100,000,000 shares outstanding DEF, $150 per share, 8,000,000 shares outstanding GHI, $40 per share, 75,000,000 shares outstanding JKL, $70 per share, 200,000,000 shares outstanding A) DEF B) JKL C) GHI D) ABC

C. GHI ABC = $1.2b Mcap DEF = $1.2b Mcap GHI = $3b Mcap JKL = $14b Mcap

Earnings momentum would be important to an analyst using which of the following portfolio management styles? A) Buy and hold B) Value C) Growth D) Tactical

C. Growth

Which of the following is an example of dollar cost averaging? A) Maintaining a constant ratio plan B) Rebalancing your portfolio each quarter on the 20th of the month C) Investing $100 into the XYZ Fund each month on the 20th of the month D) Buying 20 shares of the XYZ Fund each month on the 20th of the month

C. Investing $100 into the XYZ Fund each month on the 20th of the month

An investment manager is looking at 10 possible stocks to include in a client's portfolio. In order to create the most efficient portfolio, the manager must A) include all 10 stocks in the portfolio in equal amounts. B) include only the stocks that have the lowest volatility at a given expected rate of return. C) find the combination of stocks that produces a portfolio with the maximum expected rate of return at a given level of risk. D) include only the stocks that have the highest volatility at a given expected rate of return.

C. find the combination of stocks that produces a portfolio with the maximum expected rate of return at a given level of risk.

One feature employed by portfolio managers using a passive style is rebalancing. The purpose of this technique is A) to ensure that the client's account is being properly reviewed B) to follow a constant dollar plan C) to bring the portfolio mix back to the original asset allocation percentages D) making sure the client's account is profitable

C. to bring the portfolio mix back to the original asset allocation percentages

Although there is no universal agreement on numbers, the minimum threshold for a stock to be considered large-cap is A) $25 billion B) $10 million C) $100 billion D) $10 billion

D. $10 billion

An investment adviser representative is evaluating DEF stock to see if it is a good fit for a client's portfolio. Using the security market line (SML), what is the expected return for DEF when the return on the market is 8%, the 91-day Treasury bill is yielding 6%, DEF's beta is 1.50, and the inflation rate, as measured by the CPI, is 4%? A) 8% B) 5% C) 12% D) 9%

D. 9% ([MR - RF] x beta) + RF ([ 8% - 6%] x 1.5) + 6% (2% x 1.5%) + 6% 3% + 6% 9%

Which of the following bond strategies would be considered passive? A) Bullet B) Laddering C) Barbell D) Buy and hold

D. Buy and hold

Riley, as an investor, prefers to be on the lower end of the efficient frontier. We would expect to see which of the following risk and return combinations? A) Low risk and high return B) High risk and low return C) Low risk and medium return D) Low risk and low return

D. Low risk and low return

What is the risk measure associated with the capital market line (CML)? A) Beta B) Alpha C) Systematic risk D) Standard deviation

D. Standard deviation

The capital asset pricing model (CAPM) is based on several limiting assumptions. Which of the following statements is correct regarding the CAPM? A) The CAPM assumes that investors' expectations regarding risk and return are not identical but normally distributed. B) The CAPM does not assume that the expected excess returns for the market are known. C) The CAPM does not assume that investors have access to the same information. D) The CAPM assumes that the optimal portfolio should be the one with the highest Sharpe ratio of all possible portfolios.

D. The CAPM assumes that the optimal portfolio should be the one with the highest Sharpe ratio of all possible portfolios.

The semi-strong form of efficient market hypothesis (EMH) asserts that A) only fundamental analysis and inside information can bring added value to a portfolio. B) both public and private information is already incorporated into security prices. C) all inside information is already reflected in current stock prices. D) all public information is already reflected in security prices making fundamental analysis valueless.

D. all public information is already reflected in security prices making fundamental analysis valueless. Explanation Semi-strong EMH states that publicly-available information (fundamental analysis) cannot be used to consistently beat the market performance. It is strong form EMH which states that all inside information is already reflected in current stock prices. LO 21.i

An investor is short stock at 60. The current market price of the stock is 35, and he anticipates it will continue to decline. If he thinks the price will rise temporarily and if he does not wish to close out his short position, his best strategy to prevent a loss would be to A) sell an XYZ 35 put B) sell an XYZ 35 call C) buy an XYZ 35 put D) buy an XYZ 35 call

D. buy an XYZ 35 call Explanation This client is temporarily bullish on the stock but, in the long term, feels that it will continue to decline so the short stock position is to be maintained. If the client is correct, a near-term rise in the price of XYZ will cause the long 35 call to be in the money and the investor can sell the call at a profit. When it comes to hedging a short stock position, buying a call is always the best strategy. LO 21.k

The semi-strong form of the efficient market hypothesis (EMH) asserts that stock prices A) fully reflect all historical price information. B) don't reflect any information. C) fully reflect all relevant information, including insider information. D) fully reflect all publicly-available information.

D. fully reflect all publicly-available information.

Investment company portfolio managers are apt to classify common stocks into groups. One measurement is the product of multiplying the market price per share times the number of shares outstanding. The result is known as A) market value B) total value C) debt-to-equity ratio D) market capitalization

D. market capitalization

The portfolio of a client of an investment adviser began the year with a market value of $1.2 million. Sixty percent of the portfolio was in equities, thirty percent in bonds, and the remainder in cash. It was a good year for equities and, at the end of the year, the total value of the account was $1.5 million. This resulted in the portfolio manager liquidating approximately $100,000 of stock and placing the money into bonds. Given this information, it is most likely that this manager's investment style is A) rebalancing. B) contrarian. C) tactical asset management. D) strategic asset management.

D. strategic asset management.

The statistical method used to determine the return profile of a security or portfolio that recreates potential outcomes by generating random values based on the risk and return characteristics of the securities themselves is known as A) the capital asset pricing model (CAPM) B) the optimal portfolio C) the efficient market hypothesis D) the Monte Carlo simulation

D. the Monte Carlo simulation

A securities market investment theory that attempts to derive the expected return on an asset based upon the asset's systematic risk is A) the efficient market hypothesis (EMH). B) the Monte Carlo simulation. C) the random walk theory. D) the capital asset pricing model (CAPM).

D. the capital asset pricing model (CAPM).

Which efficient market hypothesis suggests that an investor can achieve above-market returns only by utilizing insider information? A) Semi-strong B) Strong C) Weak D) Super-strong

A. Semi-strong Explanation The semi-strong form suggests that fundamental analysis is of no value, and only through the use of insider information can an investor achieve above-market returns. The weak form suggests that technical analysis is of no value, and the strong form suggests that nothing has any value, that efficient markets are totally random. LO 21.i

In the field of portfolio management, there are a number of different management styles. One of those styles involves committing additional capital to the market when others are reducing their exposure, or eliminating positions while others are increasing theirs. This style is generally referred to as A) contrarian B) active C) growth D) value

A. contrarian

All of the following statements regarding asset allocation done by or on behalf of an investor are true except A) individual security selection is far more important than the asset allocation decision B) the process is concerned with the relationship among the returns of different assets C) the process is concerned with the risk associated with different assets D) it is the process of dividing investable assets into different asset classes

A. individual security selection is far more important than the asset allocation decision Explanation Studies have shown the asset allocation decision is the primary contributor to effective long-term portfolio management. Individual security selection is far less important in meeting investor objectives. LO 21.b

An analyst uses the dividend growth model to assist in determining appropriate stocks to recommend. This analyst would consider all of the following factors except A) market capitalization B) growth of the dividend C) required rate of return D) current dividend

A. market capitalization

When attempting to construct the optimal portfolio, the investment adviser is looking to obtain A) the maximum return for the least risk. B) the maximum return with the greatest risk. C) returns that fall within the efficient frontier curve. D) the maximum return in the shortest time period.

A. the maximum return for the least risk.