Series 66 Chapter 12

Which of the following statements describes a weak form efficient market?

Past market prices and data are fully reflected in securities prices.

A common investment strategy is dollar cost averaging. The objective of using this method of investment is the:

Average price of the securities purchased will be more than the average cost of the securities over a long period

Your client John has a portfolio of large-cap stocks representing companies in many different industries. You want to help him reduce his exposure to market risk by recommending investments that are negatively correlated with his current holdings. Of the following investments, you would most likely recommend a(n):

Bond index fund

Which of the following is a type of non-systematic risk?

Business risk - that a single company may lose its competitive advantage resulting in lower sales, corporate losses, and/or bankruptcy

Which TWO of the following statements are NOT TRUE regarding TIPS? During a period of inflation, the interest rate is adjusted upward. During a period of deflation, the principal is adjusted downward. During a period of inflation, the principal is adjusted upward. During a period of deflation, the interest rate is adjusted downward.

I and IV

If an investment increases in value, which of the following statements would be TRUE?

If it was held for less than one year, the annualized rate of return would be greater than the holding period return

While presenting a financial plan to a customer, an IAR talks about different types of risk. One of the primary risks mentioned by the IAR relates to the impact of current events, consumer confidence, and the general political climate. This risk is called:

Market risk

Barry McKenna's equity portfolio was strongly correlated to the performance of the S&P 500 Index. Barry was concerned that the S&P was overdue for a correction, so he liquidated the portfolio and moved to short-term Treasury securities that were yielding 2%. After one year, the S&P 500 returned 8%. What is the BEST term to describe the difference in the Treasuries and the S&P 500 as it relates specifically to Barry's situation?

Opportunity cost

Net present value is best described as:

Present value above cost

An investor who believes in the inherent efficiency of the markets would be least likely to adopt which of the following strategies?

Tactical asset allocation - is a form of asset allocation that is based on the belief that markets are NOT efficient and that market timing can be beneficial

A client deposits $20,000 and has expectations of an investment's future value including both income and expenses. What rate will the client's IAR use to calculate a net present value of zero?

The internal rate of return

Over the past nine years, the annual percentage returns for a mutual fund have been 7%, -6%, -3%, 8%, 6%, 5%, 11%, 13%, and 8%. What is the median return?

The median return is the middle number in a data set. When the returns in this question are listed in order from the lowest to the highest (-6, -3, 5, 6, 7, 8, 8, 11, 13), it is clear that there are four points below 7% and four points above 7%. Therefore, the median return is 7%. The answer 5.4% is the arithmetic mean (or average) of the data set. The answer 8% represents the mode, since 8% appears more often than any other number. The answer 19% is the range or the difference between the lowest and the highest number in the data set.

When determining a corporation's market capitalization, which of the following items is NOT included in the calculation?

Treasury stock - Market capitalization is determined by multiplying all issued and outstanding shares by the current market price. Since treasury stock is not outstanding, but instead held by the corporation, it is not a factor in determining market capitalization

An advisory firm is evaluating an investment opportunity for a client. Current projections show that the net present value (NPV) is equal to zero and the client requires an internal rate of return of 6%. Based on this given information, what is the investment's internal rate of return (IRR)?

When using net present value (NPV) to evaluate a project, the value of the cash inflow is compared to the cash outflows returned by the project. If the NPV is zero, then the project is assumed to return all of the cash inflow plus the required rate of return