Chapter 15 Mastery Progress Exam

An investor has invested heavily in energy stocks and the S&P Index is up by 22% from the prior year. If that sector of the S&P 500 has a beta of 1.6 and the S&P 500 increased by 10%, the investor would expect an increase in her portfolio of:

16% Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. If the beta of a stock is greater than one, it implies a higher level of risk and volatility compared to the stock market. If the beta of the stock is less than one, it is less risky and volatile than the market. The S&P 500 is assigned a beta of +1.0. If the energy sector of the S&P 500 has a beta of 1.6, it is assumed to be more volatile than the S&P 500. An increase of 10% in the S&P 500 would translate into an increase in the energy stocks of approximately 16% (1.6 x 10%). The fact that the S&P Index is up 22% from the prior year is not relevant.

When an investor compares her portfolio's performance to an average or index, the average or index is considered a(n):

Benchmark

If a portfolio manager is rebalancing a client's assets on a quarterly basis, this would be considered:

A strategic asset allocation strategy

Which of the following terms relates to the graph of optimal portfolios resulting from a comparison of risk and return?

Efficient frontier

Which of the following terms relates to the graph that is used to determine optimal portfolios resulting from a comparison of risk and return?

Efficient frontier

Which TWO of the following statements are TRUE concerning chart patterns? I. The support level of a stock is the bottom of its trading range II. A breakout above a resistance level of a stock is a bearish indicator III. Once a trendline has been established, the price movement of a stock will usually follow the trendline IV. Once a trendline has been established, the price movement of a stock will usually move away from the trendline

I and III

Which of the following choices represent logical strategies for a technical analyst? I. Buy calls when a stock breaks through a resistance level II. Buy calls when a stock breaks through a support level III. Buy puts when a stock breaks through a resistance level IV. Buy puts when a stock breaks through a support level

I and IV A technical analyst believes that if a stock's price breaks through a resistance level, it will continue to rise until it reaches the next resistance level. The analyst will purchase calls if the stock's price breaks through a resistance level. The analyst will buy puts if the stock's price breaks through a support level, since the analyst believes the stock's price will continue to decline until the next support level.

An advisory client has a portfolio that consists of a diversified group of domestic securities with different maturities. Diversification protects the client from which of the following risks? I. Business risk II. Financial risk III. Liquidity risk IV. Market risk

I, II, and III only

Of the following broad-based indicators, the one with the narrowest measure of the market is the:

Dow Jones Composite

Which of the following statements is TRUE concerning Modern Portfolio Theory?

Portfolio management should focus on diversification among different classes of assets

Which of the following descriptions regarding the Capital Asset Pricing Model (CAPM) is NOT TRUE?

It predicts future values for the stock

Which of the following statements is TRUE regarding the efficient frontier?

It's the set of optimal portfolios that provide the highest return for a given level of risk.

The Bond Buyer Index is based on which of the following securities?

Municipal bonds

Investors who subscribe to the Efficient Market theory, may invest in various indices. Which of the following indices is a small-cap benchmark?

Russell 2000

If an investor is bearish on small-cap stocks, which of the following products should be avoided?

Russell Index ETFs The Russell Index is a benchmark for small-cap stocks. All of the other answer choices track something other than small-cap equities. MSCI Emerging Market Index ETFs track securities that are listed on foreign securities exchanges of emerging markets. Diamonds are ETFs that mirror the DJIA (i.e., large-cap equities). REITs primarily invest in real estate holdings.

If a technical analyst looked at a chart of a stock to identify the support level, he would look for the point at which the stock:

Stopped decreasing

You have noticed that a customer has recently been making larger and more frequent transactions in her account. Should this be noted on her investment profile?

Yes, when a change in the client's investment pattern is noticed.

The Bond Buyer Municipal Bond Index is based on:

A 40-Bond Index

When reading a research report on an automobile company, a registered representative's use of fundamental analysis determines that the stock is a good investment. When attempting to determine the best time to execute orders to buy the stock, the registered representative could refer to:

A chart showing a recent history of the market price of the stock

Changes in an investor's profile should be updated:

At the time the change occurs.

According to technical analysis, a head and shoulders top formation indicates a trend that is:

Bearish

Of the following broad-based indexes, the one with the narrowest measure of the market is the:

Dow Jones Industrial Average

The Dow Jones Industrial Average is considered an index of:

Large-capitalized stocks

A RR should update a client's financial condition or status:

When there is a change in the clients purchases or sales that might indicate a different financial situation

A customer is seeking a high risk, high reward investment. Given this objective, which of the following is the MOST appropriate?

A stock with no dividend and a beta of greater than 2.0 Beta is a measure of a stock's (or portfolio's) volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If a portfolio's beta is 1.5, this means that the portfolio's price will change 1 1/2 times as much as the market. The term high beta is usually associated with a beta of greater than 2.0 and offers a customer a high risk, high reward investment.

The advance-decline theory states that:

It is bullish if more stocks go up than go down during the day

Which of the following choices gives the best indication of current interest rates on revenue bonds?

List of bonds with 30-year maturities

If a portfolio manager is focused on keeping a client's assigned asset allocation properly balanced over the long term, she is using a:

Strategic asset allocation strategy

Which of the following indicators is bullish?

The bottom of a saucer pattern

A technical analyst does NOT review:

The price-earnings ratio of the Dow Jones stocks

The breadth of the market is indicated best by the:

Advance-decline figures

If a mutual fund changes or adds a portfolio manager, the greatest effect would be on the fund's:

Alpha Alpha is a measure of an investment's performance on a risk-adjusted basis. The excess return of the investment relative to the return of the benchmark index is its alpha. Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. On the other hand, beta is a measure of the volatility of a security or a portfolio in comparison to the market as a whole. In other words, it is the tendency of an investment's return to respond to swings in the market (i.e., the S&P 500 Index). Essentially, the market has a beta of 1.0 and security and portfolio values are measured based on how they deviate from the market.

A portfolio's mix of investments and two potential investors are described below. 50% municipal debt 30% blue-chip common stock 10% equity mutual funds 10% money-market funds Investor A: A 45-year-old single mom who just received a $5,000,000 inheritance. Her current salary pays her living expenses and she also contributes the maximum amount to her employer's retirement plan. She is very conservative, wants to maintain the value of her portfolio as she ages, and is concerned about the tax implications of investing her inheritance. Investor B: A 65-year-old single male who receives a significant pension as well as continuing income from the residuals in a previous business relationship. He is concerned with generating too much taxable income, but is still willing to assume some risk in his portfolio. This portfolio would be considered suitable for:

Both Investor A and Investor B

A portfolio composed of five different state G.O. issues will NOT provide an investor with protection from:

Interest-rate fluctuations

According to CAPM, all of the following choices are examples of diversifiable, nonsystematic risk, EXCEPT:

Interest-rate risk

An investor purchases the following bonds: State of Florida 8% bond due 2020, State of California 8 1/2% bond due 2020, State of New York Housing Finance Agency 9% Revenue bond due 2030, and Wayne County, Michigan 8 1/2% Water and Sewer Revenue bond due 2030. This portfolio offers:

Geographical diversification

If an investor purchases several general obligation and revenue bonds issued by the state of New York, the investor can have diversification in all of the following choices, EXCEPT:

Geography

An investment that outperforms the market as it goes up but underperforms the market as it goes down would have a beta:

Greater than 1 Beta is a measure of a stock's or portfolio's volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If an investment has a beta of greater than 1, it will outperform the market as it goes up and underperform the market as it goes down. Negative betas are associated with stocks or portfolios that move in an opposite direction of the market.

Paul and Mary Smith have discussed various portfolio allocations with their adviser Chuck. He has considered the Smiths' risk tolerance and expected return in order to recommend an efficient portfolio, that is, one in which the portfolio offers the:

Highest expected return for the lowest level of risk

A fundamental analyst is NOT interested in which TWO of the following metrics? I. Short interest II. The P/E ratio III. Trading volume IV. EPS

I and III

When a stock is at its resistance price, a technical analyst will most likely say that it is:

Overbought

The beta of a stock is useful when measuring:

Systematic risk

Which of the following indexes is the broadest equity market indicator?

The Wilshire Index

Which of the following statements about technical analysis is TRUE?

The advance-decline index is a good indicator of the strength of a bull or bear market