STC series 66 Chapter 12 test
Over the past 10 years, the annual percentage returns for a mutual fund have been 7%, 8%, -9%, 8%, -4%, 5%, 6%, 8%, 10%, and 12%. Which of the following represents the mode?
8% The mode of a data set is the value that occurs most often. In this question, the mode is 8%.
An investor in the 35% tax bracket is considering investing in a corporate bond, which has a 6% coupon. In order to earn an amount equal to her after-tax return from the corporate bond, she would need to invest in a tax-free bond that is yielding:
3.9% To determine the after-tax return, multiply the yield on the corporate bond by (1 - Tax Bracket). .06 x (1 - .35) = .039 3.9% is also known as the net yield, or the after-tax return. If the investor bought a tax-free bond (e.g., a municipal bond) yielding 3.9%, divide by (1 - .35) to obtain the taxable-equivalent yield, or 6% in this example. ***yield X (1 - tax bracket**
The Dividend Discount Model is BEST described as:
A model that determines a stock price based on future dividends The Dividend Discount Model indicates that the current value of a stock should be based on its future dividends which are discounted to present value. If the current market value of a stock is less than the discounted value of future dividends, it is considered a bargain. From a practical standpoint, the model has value for utility stocks, REITs, and companies that pay steady dividends.
The possibility that a company may perform poorly, causing its stock to decline in value is called:
Business risk Business risk is the possibility that a corporation's business will not do well, causing its stock to drop in value, or even become worthless, if the company declares bankruptcy. (62067)
The S&P 500 is a(an):
Capitalization-weighted index The S&P 500 is a capitalization-weighted index. Indexes that are cap-weighted calculate their value based on the total value of the stocks, rather than the per share price. Market capitalization is determined by multiplying a company's shares outstanding x the price per share. The Dow Jones Industrial Average (DJIA) is a price-weighted index
Philip is considering the use of sector rotation as a strategy for his portfolio. Which of the following statements best describes how Philip's portfolio will be managed after implementing this strategy?
Choice of sectors for the portfolio is mainly based on economic indicators shifting investments from one business sector to another is referred to as sector rotation. As the economic cycle changes, different business sectors will be affected. Some sectors will outperform due to the change in economic activity, while others will not. The strategy is used in an attempt to profit through timing from a particular economic cycle. Based on the reading of the economy and its future direction, a portfolio will be shifted into different sectors in anticipation of a particular sector outperforming the others at that point in the business cycle. Fundamental analysis is not used to determine which sector to rotate into, though it could be used to determine which companies to buy once the sector has been chosen. The current performance of a sector will not determine the choice in which to invest or not invest, since this strategy is used to pick where to go next.
If an adviser wanted to determine a company's ability to pay debts that would be maturing in one year, the adviser would be most interested in the:
Current ratio The current ratio is a comparison of current assets to current liabilities for a one-year period. The acid-test ratio excludes inventories and usually is for a one- to three-month period
A manager of a bond fund is considering several different securities for inclusion in the fund's portfolio. Which of the following choices would the manager use to determine if these bonds are priced attractively compared to other fixed-income securities with similar credit quality and maturity dates?
Discounted cash flow (DCF) analysis Discounted cash flow (DCF) analysis is used to estimate the fair market value of various investments. DCF takes into consideration the present value of the bond's future cash flows. Duration and convexity both measure a bond's sensitivity to changes in interest rates. The Capital Asset Pricing Model (CAPM) is a way of measuring the relationship between a security's expected return and risk
ABC Farms, a regional farm, is seeking to expand its product line through the acquisition of another regional farm and has targeted XYZ Farm, which is listed on Nasdaq. XYZ Farms has established a powerful West Coast presence over the last two decades. ABC Farms has not yet contacted XYZ Farms and is in the process of formulating an initial price range for its offer. What methodology is ABC Farms most likely use to formulate its bid?
Discounted cash flow analysis Discounted cash flow analysis is used to determine a company's value based on its projected future cash flows. Duration measures a bond's price sensitivity to changes in interest rates. The future value formula determines the amount of money that a specific dollar amount being invested today will be worth in the future based on a given the number of compounding periods and an internal rate of return. The efficient market hypothesis is a theory which states that market prices reflect all relevant information and that investors cannot beat the market.
On January 1, an investor purchased 100 shares of ABC common stock for $30,000. On December 31 of that year, the shares are worth $34,000 and the investor also received $300 in dividends. What's the holding period rate of return?
Holding Period Return is also referred to as Total Return. The formula for calculating Total Return is: (Ending Value - Beginning Value) + Investment Income/Beginning Value. The investor generated a capital gain of $4,000 since the stock was purchased for $30,000 and subsequently sold for $34,000. The investor also received $300 in dividends; therefore, the holding period return is 14.33%. The calculation is done as follows: ($34,000 - $30,000) + $300/$30,000. ****(Ending Value - Beginning Value) + Investment Income/Beginning Value = holding period rate of return****
An adviser is comparing two bonds of similar credit quality and duration for a client. The client is seeking a yield of 7.2%. After performing discounted cash flow analysis on each bond, the adviser has determined that Bond A is trading at a premium to its present value, while Bond B is trading at a discount to its present value. Which TWO of the following statements are TRUE? Bond A is priced attractively and should be purchased. Bond B is priced attractively and should be purchased. The investor will earn an annual interest rate greater than 7.2% with Bond A. The investor will earn an annual interest rate greater than 7.2% with Bond B.
II and IV Discounted cash flow (DCF) analysis evaluates the present value of all coupon payments and the repayment of a bond's principal at a present value, based on a rate of return. This makes it possible to evaluate a bond's value against the investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond's principal, determine the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for a client. If a bond is trading at a discount to its present value, the investor will earn more than the interest rate that has been used to calculate the present value. Conversely, a bond that is trading at a premium to its total present value will be worth less than the price of the bond. (The investor would be overpaying for the bond.)
Which of the following would NOT be considered an active portfolio management strategy?
Indexing An indexed portfolio attempts to mirror the composition of a benchmark index, such as the S&P 500 or the Russell 2000. Since buying or selling occurs only when funds are added to or withdrawn from the portfolio, transaction costs are minimized. Sector rotation refers to a strategy that attempts to time the movement of funds into different market sectors based on differences in performance in those segments. For example, an investor who anticipates that technology stocks have reached a peak, and that utility stocks will begin to advance, might move funds (rotate) from one sector to the other.
Currently, the price of gold is increasing as the price of Treasury bills is declining. These two assets are considered:
Negatively correlated When two investments are moving in the opposite direction, they are said to be negatively correlated. Those that move in the same direction are correlated. Those that show no pattern of correlation are uncorrelated.
Which of the following statements describes a weak form efficient market?
Past market prices and data are fully reflected in securities prices. The Efficient Market Hypothesis (EMH) explains three different forms -- strong, semi-strong, and weak form efficiency. In a weak form efficient market, all past prices and data are fully reflected in current prices. In a semi-strong form efficient market, all public data, including historical pricing, is reflected in current prices. In a strong form efficient market, both public and non-public (i.e., inside) information is reflected in current prices. The assumption that investors want to minimize risk and maximize returns is made in the Modern Portfolio Theory, not the Efficient Market Hypothesis.
Which of the following choices is an asset class?
Real estate An S&P Index Fund, diamonds, baseball cards, and real estate are all assets; however, real estate is the only one that represents an asset class. For example, a baseball card is an asset but the asset class to which it belongs is collectibles.
Company A has a high price-to-book value ratio and a high price-to-earnings ratio. Company B has a low price-to-book value ratio and a low price-to-earnings ratio. What does this indicate about each company's stock?
Stock A is a growth stock and Stock B is a value stock. A growth stock tends to have high price-to-book value ratio and a high P/E ratio. Conversely, a value stock tends to have low price-to-book value ratio and a low P/E ratio.
When creating a portfolio for a client, an investment adviser first determines the client's investment objectives and risk tolerance. Based on this information, the adviser then constructs a portfolio containing specific percentages of uncorrelated investments. On a periodic basis thereafter, the adviser readjusts the portfolio to maintain the original investment mix. This approach is best described as:
Strategic asset allocation The allocation of assets into an optimal portfolio 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. Most strategic asset allocators also periodically rebalance the portfolio to restore the original asset mix
FGW Investment Advisers created an aggressive investment strategy that outperformed the market over the past four years. Recently, FGW's performance has been poor which has resulted in a loss of a few clients. In order to maintain the interest of the remaining clients, FGW holds an information session. What economic argument could FGW use to explain the reason for the poor performance?
The Efficient Market Hypothesis ]The Efficient Market Hypothesis states that financial markets are efficient and that the prices of securities reflect all known information and will adjust instantly to reflect any new information. Therefore, outperforming the market over an extended period is unlikely.
In the formula Pn = P0(1 + r)n, P0 represents:
The anticipated original investment amount The formula Pn = P0(1 + r)n is used to calculate the future value of money. P0 represents the anticipated original investment (at Year 0). Pn represents what an investment will be worth at some point in the future when the effects of compounding are taken into consideration, n represents the number of compounding periods, and r represents the rate of interest.
A company's market capitalization or size can be measured by using which of the following calculations?
The number of common shares outstanding multiplied by the market value of the stock When calculating the market capital (market cap) of a company, simply multiply the number of common shares outstanding by the current market price of the stock. Companies are referred to as small-cap, mid-cap, or large-cap.