Series 65 - Unit 21 Quiz #2

Which of the following statements is correct in relation to the efficient frontier? A) It represents the maximum return for a given level of risk. B) It implies an inefficiency in stock valuations. C) It allows an investor to create a risk-free portfolio. D) It identifies the required rate of return on a particular stock.

A. It represents the maximum return for a given level of risk.

The tactical approach to the asset allocation review process A) intentionally deviates from the normal asset mix to take advantage of market opportunities B) is designed to maintain a minimum or floor for the value of the portfolio's assets C) strives to maintain a constant asset mix over a long period of time D) requires no predictive abilities

A. intentionally deviates from the normal asset mix to take advantage of market opportunities

A well-diversified investor following a rebalancing portfolio strategy in a rising market will most likely A) sell part of the stock in the portfolio B) purchase additional stock C) write covered calls on the long stock currently in the portfolio D) sell all the stock in the portfolio

A. sell part of the stock in the portfolio

A stock has been in a downtrend for several days. When its price decreases to near $30, many investors enter orders to buy the stock and the price increases to $31. This is most likely an example of A) a support level. B) a reversal. C) a resistance level. D) a change in polarity.

A. support level

A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's A) support level B) 200-day moving average C) resistance level D) previous high

A. support level

The bond strategy used most often by those with a target goal is A) the bullet strategy. B) the laddering strategy. C) the barbell strategy. D) the duration strategy.

A. the bullet strategy.

Which of the following bond strategies would be considered passive? A) Bullet B) Buy and hold C) Barbell D) Laddering

B. Buy and hold

Buying stocks with high P/E ratios normally reflects which of the following investment styles? A) Turnaround B) Growth C) Special situations D) Value

B. Growth

Which of the following statements regarding the growth style of investing is correct? A) Growth managers believe that, although a firm's earnings are depressed now, the earnings will rise in the future as they revert to the historical range. B) Growth managers focus on the denominator in the P/E ratio, searching for firms and industries where high expected earnings growth will drive the stock price up even higher. C) Growth managers look for a high-dividend yield and often take a contrarian approach. D) Growth managers focus on the numerator in the P/E ratio, desiring a low stock price relative to earnings or book value of assets.

B. Growth managers focus on the denominator in the P/E ratio, searching for firms and industries where high expected earnings growth will drive the stock price up even higher.

In the field of securities analysis, there are many tools available. Which of the following would most likely be used by an analyst to approximate a reasonable price for a common stock? A) Yield to maturity B) The dividend discount model C) Book value per share D) Par value

B. The dividend discount model

The risk/return pyramid where the bottom is lowest risk and the "point" is the highest, generally places commodities A) at the bottom. B) at the top. C) halfway between the middle and the top. D) in the middle.

B. at the top. Explanation The risk/return pyramid shown in your LEM places commodities at the very top, the point of the pyramid. LO 21.b

An investment adviser recommended a portfolio allocation for a client with an initial deposit of $100,000 that is 50% equities, 40% bonds, and 10% cash. One year later, the portfolio value is $120,000 and consists of $10,000 cash, $65,000 equities, and $45,000 bonds. In order to rebalance the portfolio, the account would need to A) sell $5,000 of the equities and purchase $2,000 of bonds and put $3,000 into cash. B) sell $5,000 of the equities and purchase $3,000 of bonds and put $2,000 into cash. C) buy $5,000 more equities, sell $3,000 of the bonds, and add $2,000 to the cash. D) use the cash to buy $3,000 of bonds and leave everything else as is.

B. sell $5,000 of the equities and purchase $3,000 of bonds and put $2,000 into cash. Initial: $100k - 50% Equity - 40% Bonds - 10% Cash 1 year Later: Risen to $120k - $65k Equity - $45k Bonds - $10k Cash $120k Should be allocated as: - $60k Equity - $48k Bonds - $12k Cash Actions: - $5k Equity decrease - $3k Bond increase - $2k Cash increase

One of the goals of modern portfolio theory (MPT) is to construct a portfolio that provides the highest return with the lowest risk. This would be known as A) the Sharpe's portfolio B) the efficient portfolio C) the managed portfolio D) the risk-free portfolio

B. the efficient portfolio

If the current risk-free rate is 5%, and the expected return from the market is 10%, what return should we expect from a security that has a beta of 1.5? A) 15% B) 10% C) 12.5% D) 11.5%

C. 12.5% Expected Return = ([MR - RF] x beta) + RF MR: 10% RF: 5% B: 1.5 ([10% - 5%] x 1.5) + 5% = (5% x 1.5) + 5% = 7.5 + 5 = 12.5%

Which of the following investors aligns most closely with the strong form of the efficient market hypothesis (EMH)? A) An investor using dollar cost averaging to purchase shares in growth mutual funds having the highest portfolio turnover. B) An investor who uses stock charts to predict price movements and capitalize on buy-and-sell opportunities. C) An investor using a buy-and-hold strategy dollar cost averaging into an S&P 500 Index fund. D) An investor who researches corporate annual reports and industry publications to uncover buy and-sell opportunities within an industry or individual security.

C. An investor using a buy-and-hold strategy dollar cost averaging into an S&P 500 Index fund.

Based on the following information, which stock is most attractive to a value investor? A) Net worth per share of $13, current market price of $23 per share B) P/E ratio of 32:1 C) Book value of $22 per share, current market value of $17 per share D) Dividend yield of 1.3%

C. Book value of $22 per share, current market value of $17 per share

Which of the following factors would be considered by an investor who uses fundamental analysis to value a company's stock? I. The company's financial condition, as revealed by its income statement and balance sheet II. General economic conditions, such as employment levels and changes in interest rates III. Charts showing past movements in stock prices and trading volumes A) II and III B) I and III C) I and II D) I, II, and III

C. I and II

A successful dollar cost averaging strategy requires I. stable market conditions II. volatile market conditions III. a fixed dollar amount invested monthly IV. a fixed number of shares purchased monthly A) I and IV B) II and IV C) II and III D) I and III

C. II and III

Which efficient market hypothesis suggests that an investor can achieve above-market returns only by utilizing insider information? A) Strong B) Super-strong C) Semi-strong D) Weak

C. Semi-strong Explanation The semi-strong form suggests that fundamental analysis is of no value, and only through the use of insider information can an investor achieve above-market returns. The weak form suggests that technical analysis is of no value, and the strong form suggests that nothing has any value, that efficient markets are totally random. LO 21.i

A portfolio manager with a growth style would probably diversify by A) concentrating in stocks in one or two industries B) attempting to build a portfolio with a very high correlation C) devoting a portion of the portfolio to securities with a negative correlation D) placing a portion of the portfolio into high-yield bonds

C. devoting a portion of the portfolio to securities with a negative correlation

All the following factors support fundamental analysis while assessing a wide range of qualitative factors except A) the company's business model. B) the company's management team's quality and experience. C) the company's stock price trend. D) the company's competitive position.

C. the company's stock price trend.

One of your clients is confused about the difference between active and passive styles of management. It would be correct to state that, compared to the active style, passive portfolio managers A) are likely to charge higher fees. B) generally manage mutual funds while active managers manage closed-end companies. C) would be more likely to include index funds or ETFs in their portfolio. D) tend to try to time the market.

C. would be more likely to include index funds or ETFs in their portfolio.

Your customer, age 29, is seeking a long-term growth investment, is concerned about the loss of purchasing power as a result of inflation, and often complains about high commissions that reduce his investment returns. When he was in college, he took a few economics courses and firmly believes that securities analysts cannot consistently outperform the overall market. Which of the following mutual funds is the most suitable for the customer? A) NC Growth & Income Fund B) ATF Biotechnology Fund C) ZB Asset Allocation Fund D) ARG Stock Index Fund

D. ARG Stock Index Fund

Which of the following statements concerning market efficiency is least accurate? A) If weak form market efficiency holds, technical analysis cannot be used to earn abnormal returns over the long run. B) If strong form of market efficiency holds, even insider information cannot be used to earn abnormal returns. C) If semi-strong form market efficiency holds, technical and fundamental analysis cannot be used to earn abnormal returns over the long run. D) An efficient market assumes one can generate abnormal returns with active portfolio management.

D. An efficient market assumes one can generate abnormal returns with active portfolio management.

Which of the following is not a type of diversification that is achieved by investing in international equities? A) Style B) Currency C) Geographic D) Asset class

D. Asset Class Explanation Following a value or a growth style, or using a buy-and-hold strategy, is independent of the continent of domicile of the issuer. Investing in different countries diversifies investments among various currencies, other than the client's domestic currency. Different geographic areas have different types of industries whose performance may vary on the basis of regional resources. International equities are considered another asset class for purposes of asset allocation in one's portfolio. LO 21.e

Based on the following information, which stock is most likely to appeal to a growth investor? A) P/E ratio of 8:1 B) Book value of $22 per share, current market value of $17 per share C) Dividend payout ratio of 65% D) Dividend yield of 0.3%

D. Dividend yield of 0.3%

An investment adviser has the practice of rebalancing client portfolios on an annual basis. This would be an example of which management style? A) Churning B) Market timing. C) Tactical asset management D) Strategic asset management

D. Strategic asset management

Which of the following is not included in fundamental analysis of a company? A) The study of a firm's financial statements. B) The study of the direction of the economy. C) The study of a firm's position within its industry. D) The study of a company's historical stock prices and trading volume.

D. The study of a company's historical stock prices and trading volume. Explanation Studying historical stock prices and volume is related to technical analysis. Fundamental analysis is concerned with the earnings potential and risk associated with a particular firm. Doing so requires viewing the entire economy, that company's industry, and its financial statements. LO 21.d

One method used by some analysts to estimate the future value of a stock is the dividend growth model. This model would probably be most useful in the case of A) a small-cap stock B) a preferred stock C) a AAA corporate bond D) a large-cap stock

D. a large-cap stock

A portfolio manager who follows the value style of investing would most likely purchase shares A) at the high end of their price range for the past 52 weeks B) based on their market capitalization C) that are currently trading with a higher than average volume D) at the low end of their price range for the past 52 weeks

D. at the low end of their price range for the past 52 weeks

Writing a call option provides all of the following except A) hedging. B) limited downside protection when long the underlying asset. C) income. D) maximum protection against loss.

D. maximum protection against loss.

The management style that is most similar to buy and hold is: A) active management. B) contrarian. C) tactical management. D) strategic management.

D. strategic management.

A support level is the price range at which a technical analyst would expect A) the supply of a stock to decrease substantially. B) the supply of a stock to increase substantially. C) the demand for a stock to decrease substantially. D) the demand for a stock to increase substantially.

D. the demand for a stock to increase substantially.