Series 65 Unit 21 Checkpoint Exam

An investment adviser is doing some research on a company and notices that the current market price is $21 per share. The most recently reported earnings per share is $3, and the company is paying a $0.26 quarterly dividend. On the balance sheet, the company is carrying a significant amount of cash. This company would probably be attractive to this adviser if his investment style was A) value. B) growth. C) passive. D) contrarian.

A value. Explanation This is an example of the kind of company appealing to those who follow a value style of portfolio management. The company is selling at a low price-to-earnings (P/E) ratio of 7 to 1 ($21/$3) with a liberal dividend yield of 4.95% ($1.04/$21). The high cash balance only adds to the value. LO 21.e

An adviser who does not believe he can time the market, or pick those securities that will outperform their benchmarks, would have which of the following as the most important portfolio consideration? A) Minimizing investment expense and proper asset allocation B) Looking for asset classes that will outperform their benchmarks C) Maximizing current income to provide a solid base for total return D) Selecting stocks that are expected to outperform their benchmarks

A. Minimizing investment expense and proper asset allocation

Which of the following statements regarding a bond ladder strategy is correct? A) A laddered portfolio of bonds will provide lower yields than a portfolio consisting entirely of short-term bonds. B) A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk. C) A bond ladder strategy is generally more aggressive than a bond barbell strategy. D) A bond ladder strategy involves the purchase of very long-term and very short-term bonds.

B. A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk.

Which of the following bond strategies is the least active? A) Ladder B) Bullet C) Yield curve D) Barbell

B. Bullet

Customer A and Customer B each have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments? I. Receiving cash distributions may reduce Customer A's proportional interest in the fund. II. Customer A may use the cash distributions to purchase shares later at NAV. III. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. IV. Due to compounding, Customer B's principal will be at greater risk. A) II and IV B) I and III C) I and IV D) II and III

B. I and III

An individual who is a proponent of the efficient market hypothesis (EMH) will likely invest in which of the following? A) Sector mutual funds B) Index funds C) Growth mutual funds D) Balanced mutual fund

B. Index funds

Which of the following describes an investment management style? A) Rebalancing B) Large capitalization C) Current income D) Margin

B. Large capitalization

An optimal portfolio is one that A) offers the greatest reward for the highest risk. B) lies on the efficient frontier. C) is diversified in such a manner as to nearly eliminate systematic risk. D) works well in bull markets but suffers when there is a market reversal.

B. lies on the efficient frontier.

Which of the following are asset classes? A) Forward contracts B) Large-cap stock funds C) REITs D) Options

C. REITs Explanation The general consensus is that the major classes, for purposes of an asset allocation program, are equity, debt, cash (or cash equivalents), real estate, and commodities. Large-cap stock funds are not a separate asset class; they are a way to invest in the asset class known as equity. Derivatives, such as options, are not generally considered an asset class; it is the actual commodity (precious metals, oil, and so forth), not a forward or futures contract, that is the asset class. Most agree that real estate investment trusts (REITs) can serve as a proxy for real estate itself. LO 21.a

An analyst using the dividend growth model would take into account all of the following factors except A) the investor's required rate of return. B) the growth of the dividend. C) the current earnings per share. D) the current dividend.

C. the current earnings per share.

A mutual fund investor is using a dollar cost averaging strategy. For the average price per share to exceed the investor's average cost, which of the following conditions must be present? I. The market price per share fluctuates with each purchase. II. A fixed dollar amount is invested at regular intervals. III. A fixed number of shares is purchased monthly. IV. A constant dollar value is maintained in the account. A) I and III B) II and IV C) II and III D) I and II

D. I and II

One of the offshoots of the capital asset pricing model (CAPM) is the capital market line (CML). The equation for the CML uses which of the following? A) Beta B) Alpha C) Correlation coefficient D) Standard deviation

D. Standard deviation

A securities analyst does not believe that markets are highly efficient. This analyst most likely follows which of the following investing strategies? A) Passive B) Strategic C) Indexing D) Tactical

D. Tactical

Sector rotation would most likely be employed by an investment adviser using which of the following investment styles? A) Strategic B) Buy and hold C) Contrarian D) Tactical

D. Tactical

The use of futures to hedge against a price increase is best referred to as A) a short hedge. B) a trimmed hedge. C) a neutral hedge. D) a long hedge.

D. a long hedge.

Diversifying a portfolio could be expected to provide all of the following benefits except A) improving returns. B) dampening volatility. C) reducing overall risk. D) reducing transaction costs.

D. reducing transaction costs.

Your client owns 500 shares of RMBN purchased at $11.94 per share. The stock is now selling for $12.70 per share, and the client is concerned that the market may turn downward. You could suggest protecting the profit by A) buying five RMBN 12.50 puts. B) buying five RMBN 12.50 calls. C) buy one RMBN 12.50 put. D) selling five RMBN 12.50 puts.

A. buying five RMBN 12.50 puts.

According to the efficient market hypothesis, information found when reading The Wall Street Journal would be considered A) sem-istrong form market efficiency. B) weak form market efficiency. C) random walk. D) strong form market efficiency.

B. weak form market efficiency. Explanation The closer to inside information, the stronger the information is. Anything published in widely read media would be considered very weak. An example of semi-strong would be, "information found when reading a listed company's financial statements". An example of strong would be, "overhearing two lawyers discussing an upcoming merger announcement they were preparing". LO 21.i

In contrast to the strategic approach, tactical asset allocation A) consistently provides higher net returns whether the market is performing well or is in decline. B) offers significant commission savings by generally qualifying for a lower commission schedule than a strategic manager. C) continuously adjusts the asset allocation and class mix in an attempt to take advantage of changing market conditions. D) is used to determine an appropriate allocation based on the long-term financial goals of the client.

C. continuously adjusts the asset allocation and class mix in an attempt to take advantage of changing market conditions.

An investor does not wish to attempt to time the market, so she invests $300 each month into the GEMCO Growth Fund. Over the past five months, her purchase prices have been $10, $12, $15, $20, and $25. On the basis of this information, if she were to stop investing at this point and sell her shares two months from now when the net asset value (NAV) is $15 per share and the public offering price is $15.79, it would be correct to state that her A) proceeds were $15.79 per share. B) average cost per share was $16.40. C) realized loss was $1.40 per share. D) cost basis for tax purposes was $14.71.

D. cost basis for tax purposes was $14.71. Explanation This client is taking advantage of dollar cost averaging. Each month, the $300 investment acquires a different number of shares. Take a look at the math below: Month 1: $300 @ $10 per share = 30 shares Month 2: $300 @ $12 per share = 25 shares Month 3: $300 @ $15 per share = 20 shares Month 4: $300 @ $20 per share = 15 shares Month 5: $300 @ $25 per share = 12 shares Total cost is $1,500. Total number of shares is 102. She spent $1,500 and bought a total of 102 shares. Dividing her cost ($1,500) by the number of shares (102) results in a cost per share of $14.71, and that is her cost basis for tax purposes. When redeeming, she would receive the NAV of $15 per share, not the public offering price. There is no loss here because the proceeds of $15 per share exceed the cost of $14.71. LO 21.j

An investment adviser (IA) explaining modern portfolio theory (MPT) to a client might make all of the following statements except A) if two securities offer the same risk, choose the one with the higher return. B) if two securities offer the same rate of return, choose the one with the lower risk. C) if one security has a higher return than another and at the same time has a lower risk, choose it. D) if one security has a higher return than another and at the same time has a higher risk, choose it.

D. if one security has a higher return than another and at the same time has a higher risk, choose it.

Your client's child is entering college next year. Which of the following would be the most appropriate recommendation? A) A five-year laddered portfolio of U.S. Treasury notes B) A large-cap growth fund C) A U.S. Treasury note mutual fund D) A zero-coupon bond maturing in five years

A. A five-year laddered portfolio of U.S. Treasury notes

All of the following are examples of a portfolio diversified through asset allocation except A) Daniel's portfolio, which consists of shares of common stock in 52 different corporations. B) Dawson's portfolio, which consists of shares of preferred stock, Treasury bonds, and Treasury bills. C) Daniella's portfolio, which consists of shares of common stock, municipal bonds, and money market funds. D) Dakota's portfolio, which consists of shares of common stock, corporate bonds, and jumbo CDs.

A. Daniel's portfolio, which consists of shares of common stock in 52 different corporations.

An investor is long 100 shares of XUZ common stock. If the investor wishes to generate some additional income while also creating a partial hedge, the recommended strategy would be to A) go short an XUZ call. B) go long an XUZ call. C) buy additional XUZ stock. D) go short an XUZ put.

A. go short an XUZ call.

Published studies have shown that much of the performance of a portfolio can be attributed to which of the following factors? A) Security selection B) Asset allocation C) Other factors D) Market timing

B. Asset allocation

Proponents of which of the following technical theories assume that small investors are usually wrong? A) Advance/decline B) Breadth of market C) Odd lot D) Short interest

C. Odd lot

One of the asset allocation classes is fixed income securities. When an investment adviser representative is determining which securities should fill that portion of the client's portfolio, which of the following would not be included? A) Treasury bonds B) Mortgage-backed securities C) Preferred stock D) Municipal bonds

C. Preferred stock Explanation Although generally referred to as a fixed-income security due to its fixed dividend, for asset allocation purposes, preferred stock is included in the equity class. Historically, Treasury bonds have a negative correlation to preferred stock (about ‒0.20), while the S&P 500 has a correlation of about +0.60. LO 21.a

The dividend discount model is A) primarily used by technical analysts. B) the inverse of the price-to-earnings ratio. C) an analytical tool used to value a common stock using the present value of future dividends. D) based on the dividend payout ratio.

C. an analytical tool used to value a common stock using the present value of future dividends.

As a technique in portfolio management, portfolio diversification reduces A) systematic risk. B) market risk. C) unsystematic risk. D) interest rate risk.

C. unsystematic risk.

If the expected return on the market is 20% and the risk-free rate is 4%, a stock with a beta coefficient of 0.8 would have an expected rate of return under CAPM of A) 16.0%. B) 19.2%. C) 12.8%. D) 16.8%.

D. 16.8% Expected Return = ([MR - RF] x beta) + RF MR: 20% RF: 4% B: 0.80 ([20 - 4] x 0.8) + 4 (16 x 0.80) + 4 12.8 + 4 16.8

If an investor practices value investing, which of the following stock types is the investor least likely to purchase? A) A stock with negative earnings in the most recent quarter B) A stock that is presently selling for ⅔ of net tangible assets C) A stock that has exhibited a high dividend yield in the past D) A stock with an above-average price-to-earnings ratio

D. A stock with an above-average price-to-earnings ratio

One popular method used to predict the expected return of a stock is the capital asset pricing model (CAPM). Analysts using CAPM rely on all of these except A) the beta coefficient of the stock. B) the risk-free rate available in the market. C) the expected return on the market. D) the standard deviation of the stock.

D. the standard deviation of the stock.