Investment Selection

What is the minimum information needed to calculate the weighted average rate of return for a portfolio?

1. security market price 2. number of shares 3. % return of security

Bottom-up equity managers include: 1. Group rotation managers. 2. Value managers. 3. Market timers. 4. Technicians.

2 and 4. 1 and 3 of course are top down style

Which of the following best describes a long hedge position? A. The investor is short the underlying commodity and long the futures contract. B. The investor is long the underlying commodity and short the futures contract.

A. A long position in a futures contract is when the investor buys a futures contract. A short position in a futures contract is when the investor sells a futures contract. A long hedge means that the investor owns (buys) the futures contract to insure a certain price of a commodity that he or she does not yet own. Hedging is taking an opposite futures position than the investor's inherent underlying position.

During the peak of the economic cycle, which of the following should one undertake? A. Sell debt instruments B. Begin allocations to cash positions C. Buy debt instruments D. Sell gold and real assets

A. and B. only At the peak of the market, there will be high demand for debt instruments, driving prices of bonds up. Bonds have an inverse relationship with interest rates, not the market. They tend to be a more stable (but still can have price movement) investment option when the market is making swings. It would be safer to move to cash when the market is expected to make a downturn.

Top-down analysis

An investment selection approach that begins with consideration of macroeconomic conditions and then evaluates markets and industries based upon such conditions.

Bottom-up analysis

An investment selection approach that focuses on company-specific circumstances rather than emphasizing economic cycles or industry analysis.

Which of the following investment vehicles are most appropriate for an emergency fund for a family with $12,000-a-year discretionary income? A. Balanced mutual fund. B. Line of credit. C. Money market mutual funds. D. Laddered CDs set to mature every 6 months.

C and D Though a line of credit might make a reasonably good emergency fund, the question asks for "investment vehicles" (which make Options "III" and "IV" correct.)

The value of the convertible bond as a debt instrument does not depend on which of the following? A.The bond's coupon. B.Current interest rates. C.The conversion price of the bond. D.The term of the bond.

C. The value of the bond as a debt instrument is considered separately from its convertibility

You are about to choose a new mutual fund to add to client portfolios. As you review the Morningstar reports for the funds you are considering, you have focused on each fund's alpha as reported by Morningstar. Alpha tells you: A. Each fund's performance relative to a benchmark, such as the S&P 500. B. A fund's percentage return above the risk-free rate of return. C. The difference between a fund's realized return and its risk-adjusted expected return.

C. Alpha is the fund's actual return minus the risk adjusted expected return, as measured by CAPM.

Which of the following are true statements about the Capital Asset Pricing Model (CAPM)? 1 The Security Market Line (SML) by itself does NOT determine the optimal portfolio for an investor. 2 Beta is used as a measure of risk on the Security Market Line (SML). 3 The required return is beta times the market return. 4 As investors replace risk-free assets with risky assets, the required return will rise.

Choice "3" only- The required rate of return is determined by adding the risk premium (which is the market rate of return minus the risk free rate times the beta) to the risk free rate of return

do convertible bonds offer growth and income?

Convertible bonds offer income as a bond and growth potential when converted to a stock.

Lily Wassenbaum asks for your assistance in designing an educational investment program for her eight-year-old son, Max. She expects to need the funds in about 15 years when her AGI will be approximately $55,000. She wants to invest at least part of the funds in tax-exempt securities. Help her select which investment(s) would yield tax-exempt interest on her federal return if the proceeds were used to finance Max's education. A. Treasury bills. B. EE bonds. C. GNMA funds. D. Zero coupon Treasury bonds.

EE Bonds Only Options "I", "III" and "IV" all generate taxable income during their inclusion in Lily's portfolio: T-bills upon maturity, GNMA when income is paid, and Treasury zeros as the interest accrues within the bond, even though Lily will see no return paid to her. This is known as phantom income and it is fully taxable.

ex-dividend date

If an investor purchases shares on or after the ex-dividend date, they will not be entitled to a dividend payment.

long hedge vs short hedge

In a short-hedged position, the entity is seeking to sell a commodity in the future at a specified price. The company seeking to buy the commodity takes the opposite position on the contract known as the long-hedged position

According to fundamental analysis, which phrase best defines the intrinsic value of a share of common stock

Intrinsic value is the discounted value of a future stream of cash flows. In the case of a stock, its dividends

An investor who would like to know how a portfolio manager performed relative to how the manager was expected to perform on a risk-adjusted basis would use which one of the following indicators?

Jensen's alpha

series ee bonds

Series EE bonds are low-risk U.S. savings bonds that are issued by the U.S. Treasury. They have a 30-year term and are guaranteed to double in value after 20 years You can buy an electronic EE bond for any amount from $25 to $10,000. There is a $25 minimum investment requirement. The interest earned on series EE and Series I bonds can be used tax-free for college if the following conditions are met: The funds are used for qualified educational expenses for parent or dependent child. you get phased out at higher incomes for the tax benefit of Series EE bonds.

jensens alpha vs sharpe ratio

Sharpe ratio measures the unit of return earned for every unit of risk undertaken. It defines risk in terms of standard deviation, which is a measure of total risk. Alpha is the excess returns relative to risk-adjusted expected return Treynor ratio is an extension of the Sharpe ratio. Instead of using total risk, Treynor uses beta or systematic risk in the denominator.

T+2 Settlement

The T+2 settlement - Currently, stocks settle following the T+2 formula. In order for you as a buyer to receive the dividend, your settlement must occur on or before the record date. It takes three days to settle: the day the trade is initiated (T) plus two business days.

Jennifer has asked you if you would advise her regarding several different types of investments. Her preference would be for an investment where she can simply put a fixed number of dollars into an investment and not worry about it. She wants the following: completely tax-advantaged investments, a moderately competitive interest rate, with relative safety, and very low fees. She would eventually like to be assured of getting her principal back, but does not require a great deal of liquidity. Which of the following would you recommend to her in order to best meet her goals? A) Municipal Bond Mutual Fund. B) Municipal Bond Unit Trust. C) High Yield Money Market Fund. D) Tax Free Money Market.

The correct answer is B. UITs have no money manager, just a trustee, the fees will be lower. You can sell back to the fund or wait until maturity. Due the tendency of Muni-Bond Fund managers to attempt to maximize profits by buying and selling various bonds, there are generally taxable gains to be dealt with in most of these funds. High Yield and Government Bond funds offer no tax advantage. Tax Free Money fund is highly liquid and the client stated they did not require much liquidity, nor does it have a moderately competitive interest rate.

A young couple (both age 30) comes to the financial planner with the desire for assistance in improving their family's financial position. They have two healthy children, ages 3 and 6. The husband is a foreman for a manufacturer of auto parts. His current salary is $30,000 per year. The wife is a marketing professor for a state university. Her current salary is $40,000 per year. The couple recently purchased a riverfront home for $100,000 using their entire savings of $20,000 as a down payment. In addition to an $80,000 mortgage, the couple's only debt is an automobile loan having a balance of $12,000. Both husband and wife have very good family health insurance from their employers. The wife has employer-paid life insurance equal to two times her annual salary. When the couple is able to begin an investment program, they want to begin making investments for their retirement and their children's education. Which of the following actions will be the LEAST tax-efficient manner of helping to accomplish the stated goals? A. Investing in individual Roth IRAs. B. Investing through a 403(b) program for the wife. C. Investing in a growth and income mutual fund. D. Investing in Coverdell Educati

The correct answer is C. The growth and income mutual funds offer no tax-efficient advantage.

Bob and Betty have approached you looking for the right hedge against possible, expected future inflation. You suggest to them that they: A. Invest in technology stocks. B. Invest in commodity futures. C. Invest in long-term U.S. Treasury issues. D. Invest in precious metals.

The correct answer is D. None of the choices are necessarily stellar, but in contrast to the other choices, Option "D" makes far more sense, as metals have generally performed well as inflation hedges over time.

What does a stock dividend signal to investors?

The firm is retaining capital growth related activities. The stock dividend is often taken as a favorable signal. It is used for acquisition, increased R&D or occasionally to fend off takeovers. It is more common to see large amounts of debt taken on to make the firm seem less attractive if large amounts of cash are required.

how is GNMA taxed how's it invested?

The interest income on GNMAs generally is subject to federal and state taxes. issues agency bonds backed by the full faith and credit of the U.S. government Government National Mortgage Association (GNMA) pass-through certificates, which are fixed income securities representing part ownership in a pool of mortgage loans backed by the U.S. government.

Odd Lot Theory

Theory that the ODD LOT investor who trades in less than 100-share quantities is usually wrong and that profits can be made by acting contrary to odd-lot trading patterns.

the ex-dividend date is the business day after the ________

Therefore, the ex-dividend date for a cash settlement transaction is the business day after the record date.

The primary reason for using a ladder bond strategy is to: A. Lower overall interest rate risk. B. Immunize the bond portfolio.

a. The ladder bond strategy staggers maturities and in doing so, reduces the exposure to interest rate risk, as you are likely holding until maturity.

does treynor use beta or standard deviation?

beta

Your client, Bill Brown, is an investor in ONLY dividend paying stocks. He buys them in time to catch the dividend and then sells them. You have a stock that you have researched, Gamma Globe, and it generally pays very high dividends relative to its price. What will you advise Bill to do in regard to this stock? a. Wait until the stock goes ex-dividend to make the purchase, and sell immediately thereafter. b. Get in on Gamma Globe's action for the long haul, that is "buy and hold." c. Purchase the stock to own it by record date, and sell when the price has rebounded. d. It doesn't matter when Bill buys it, but once purchased, Gamma Globe should be held only in preparation for almost certain subsequent price increases.

c. It is the only answer that matches the client's express strategy. With the current T+2 settlement time frame, the client would need to purchase 2 business days prior to record date, or the business day prior to ex-date. Buy and hold is not what the client wants, and ex-dividend dates are too late to get in on the dividend action which the client seeks.

Of the following investment, which is designed to provide growth and income? - Raw land. - Convertible bond.

convertible bond. Raw land does not receive income.

Treasury security Taxation

federally taxable, but not state and local.

do mortage REITs provide growth and income?

no. they only provide income.

record date (dividends)

specific date on which the company will determine who will receive the dividend (registered owners of stock)

does sharpe use beta or standard deviation?

standard deviation

Price Indicator

technical analysis using advances and declines due to pricing of stocks

charting indicator

technical analysis using movements of the charts?

market indicator

technical analysis using the directions of the market.

volume indicator

technical analysis using volume of shares traded

A child is 8 years old and the parents want to invest today for the child's education. The parents have AGI of $210,000. Which investment vehicle would you recommend? Series EE savings bonds. S&P 500 index fund.

the index fund. The S&P 500 index fund is the best answer because the time horizon is long term (10 years). The parents are currently phased-out of the interest income tax exclusion benefit on the series EE savings bonds. (For 2023, the phaseout for Series EE bonds begins at a modified adjusted gross income (MAGI) of $91,850 and completely phases out at $106,850. For married couples filing jointly, the phaseout starts at $137,800 and ceases at $167,800)

During the peak of the economic cycle, which of the following should one undertake? A. Sell debt instruments B. Begin allocations to cash positions C. Buy debt instruments D. Sell gold and real assets

this one is here twice just to memorize, because it doesnt make sense to me. A. and B. only At the peak of the market, there will be high demand for debt instruments, driving prices of bonds up. Bonds have an inverse relationship with interest rates, not the market. They tend to be a more stable (but still can have price movement) investment option when the market is making swings. It would be safer to move to cash when the market is expected to make a downturn.

to be eligible for the dividend, you will need to... (ex-div date, record date)

to be eligible for the dividend, you will need to buy the stocks before the ex-dividend date, which generally is two days before the record date