Series 66

An investment advisory client's holdings consists of: $ 6,000,000 -- Stock/bonds$ 1,000,000 -- Money-market funds$ 3,000,000 -- Real estate, commodities$10,000,000 -- Total assets Would these holdings be considered a securities portfolio?

Yes, because more than 50% of the assets are securities.

The Dividend Discount Model is BEST described as:

A model that determines a stock's price based on future dividends.

An investor owns a TIPS bond that has a coupon rate of 5%. What happens to her TIPS if the CPI increases 3%?

The principal increases by 3%.

A portfolio has a beta of 1.0 and an expected return of 12%. What would the alpha of the portfolio be if the beta was 1.4 and the actual return was 18.8%?

2.00%

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

A strategic asset allocation strategy

The possibility that a company may perform poorly, causing its stock to decline in value is called:

Business risk

Barry McKenna's equity portfolio was strongly correlated to the performance of the S&P 500 Index. Barry was concerned that the S&P was overdue for a correction, so he liquidated the portfolio and moved to short-term Treasury securities that were yielding 2%. After one year, the S&P 500 returned 8%. What is the BEST term to describe the difference in the Treasuries and the S&P 500 as it relates specifically to Barry's situation?

Opportunity cost

Which of the following securities have no loan value?

Options that have nine months or less until expiration

A client has his portfolio invested in a number of different equity securities in the energy, manufacturing, and technology sectors. His investment adviser representative wants to help him reduce his systematic risk. Which of the following types of securities would the IAR most likely discuss with the client?

Securities which have a negative correlation with the securities that are currently in his portfolio, such as debt instruments.

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

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

A company's PE ratio has historically been 30, but it has recently dropped to 15. In this case, what has most likely happened to the company?

The price of the company's stock has fallen.

One of an IAR's clients recently won a lottery and has the option of receiving $100,000 immediately or $150,000 over the next 15 years. What financial concept will help the client make the best decision?

Time value of money

Which of the following return calculations removes the distortions caused by the deposit and withdrawal of capital from an investment account over time?

Time-weighted return

A TIPS is issued at par and has a coupon of 4.0%. What's its principal value if the CPI increases 3%?

$1,030

A portfolio has an alpha of 0%, a beta of 1.0, and an actual return of 12%. What would the alpha of the portfolio be if the beta was 0.9 and the actual return was 10.6%?

-0.20%

If a corporation had annual earnings per share of $2.40, and $1.60 was retained by the corporation, the annual dividend payout ratio is what percentage of earnings?

33%

A corporation has the following financial information: $3 million in cash$5 million in accounts receivable$8 million of inventory$7 million of equipment$2 million in short-term debt$40 million in long-term debt$4 million accounts payable What's the corporation's current ratio?

8:3

A common investment strategy is dollar cost averaging. The objective of using this method of investment is the:

A common investment strategy is dollar cost averaging. The objective of using this method of investment is the:

Which TWO of the following statements are TRUE? A customer will sell at the ask. A customer will sell at the bid. A customer will buy at the bid. A customer will buy at the ask.

A customer will sell at the bid. A customer will buy at the ask.

What formula is used to find the present value of an investment by using a future value that is decreased at a compound rate over time?

A discounting formula

Which TWO of the following statements are TRUE of stop orders? A stop order may be described as a suspended market order A stop order may be executed only at the stop price or better A stop order, when triggered, guarantees an execution A stop order, when triggered, becomes a limit order and needs its limit price to be satisfied for execution

A stop order may be described as a suspended market order A stop order, when triggered, guarantees an execution

After carefully considering a client's investment objectives, an investment adviser recommends a number of investment options to the client. In addition to seeking long-term appreciation, the client is also concerned with the risk of losing his entire investment. The adviser may recommend a portfolio that provides both growth potential and diversification. The adviser's recommendations for diversification would NOT include:

A technology index mutual fund

Which of the following is a measure of non-systematic risk?

Alpha

Regarding risk tolerance and suitability, Modern Portfolio Theory contends that:

An investment that is risky on its own might be less risky in a portfolio if it behaves independently from the other investments in that portfolio

Al Jackson has $20,000 to invest and would like to hold a diversified portfolio of stocks, bonds, and money-market instruments. He would like to change the percentage invested in each of these categories as the financial markets change. However, he does not believe he will have the time to monitor the markets and make adjustments to his portfolio. The type of mutual fund that would be MOST suitable for Mr. Jackson is a(n): QID: 1507492 Mark For Review Asset allocation fund

Asset allocation fund

Your client, Robert Bonderman, would like to invest in a fixed-income security for his portfolio. He needs to balance risk and return. Which of the following investments will provide Robert with the highest overall return, while avoiding speculative-grade investments?

BBB collateral trust certificate, present value = $1,261, market price = $1,158

Your client John has a portfolio of large-cap stocks representing companies in many different industries. You want to help him reduce his exposure to market risk by recommending investments that are negatively correlated with his current holdings. Of the following investments, you would most likely recommend a(n):

Bond index fund

An investment adviser rebalances a client's portfolio by liquidating a single stock position and investing the proceeds into an index fund. Which of the following risks did the adviser reduce the MOST?

Business risk

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? Business risk Financial risk Liquidity risk Market risk

Business risk Financial risk Liquidity risk

Which statement best summarizes the benefits of a buy-and-hold compared with an active management strategy?

Buy-and-hold investing gives investors both lower transaction costs and lower tax liabilities.

Which of the following factors is a disadvantage of a buy/hold strategy?

Changing portfolio risk levels

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

If an adviser wants to evaluate a publicly traded firm's ability to pay down its short-term debt, which ratio would be most appropriate?

Current Ratio

A client is primarily concerned with having enough money to retire in 20 years. All of the following are considerations when making recommendations to the client, EXCEPT:

Current interest rates

If an analyst wants to measure the degree to which a company or partnership is leveraged, he would calculate the:

Debt-to-total capital ratio, which is debt / total capital

An investment adviser is evaluating several bonds on behalf of a client. One measure of a bond's price sensitivity is its:

Duration

A client who is willing to accept market risk should be advised to accept which of the following investment recommendations?

Eliminating the unsystematic or diversifiable risk in his portfolio

After occurrence of the event for which a filing is required, when must a Form 8-K be filed?

Four days

If the NPV (net present value) of an investment is greater than zero, the investment will provide a return:

Greater than the discount rate used

The manager of a value fund will look for securities that have which of the following characteristics?

High dividend yields

The rate of return that a mortgage company may earn over the life of a loan to a customer is the:

Holding period rate of return

If an investment increases in value, which of the following statements would be TRUE?

If it was held for less than one year, the annualized rate of return would be greater than the holding period return

Which of the following asset management techniques would NOT be used to identify a security that is either undervalued or overvalued?

Indexing

A sector rotation strategy would include investing in which of the following?

Industrial stocks in an expanding economy

In a down market, which of the following is a risk of using dollar cost averaging (DCA)?

Investments are not protected against losses

Which TWO of the following statements are TRUE of the dividend discount model? The model is only used for large cap stocks It is used to determine a stock's value by predicting future dividends and discounting them back to present value If the value determined by the model is higher than the stock's current value, then it is undervalued If the value determined by the model is higher than the stock's current value, then it is overvalued

It is used to determine a stock's value by predicting future dividends and discounting them back to present value If the value determined by the model is higher than the stock's current value, then it is undervalued

Which of the following statements is TRUE about indexing?

It may result in a portfolio that does not accurately track the index.

Which of the following choices is NOT a benefit of discounted cash flow, fixed-income analysis?

It permits an adviser to minimize cash flow reinvestment risk

Which types of investments have historically shown a great deal of exposure to regulatory risk?

Limited partnerships

Which of the following is NOT a type of systematic risk?

Liquidity risk

All of the following risks are considered types of unsystematic risk, EXCEPT:

Market risk

Currently, the price of gold is increasing as the price of Treasury bills is declining. These two assets are considered:

Negatively correlated

According to modern portfolio theory (MPT), the expected return of an investment is the:

Possible returns on the investment weighted by the likelihood that return will occur

All of the following statements regarding the Capital Asset Pricing Model (CAPM) are TRUE, EXCEPT it:

Predicts future values for the stock

Which formula is used to perform discounted cash flow analysis for a bond?

Present value

What does the Sharpe Ratio measure?

Return of an asset based on the amount of risk being assumed

An IAR is analyzing various fixed-income securities for a client's portfolio. She notes that the yield curve is normal. This indicates that: Short-term bonds are yielding more than long-term bonds Short-term bonds are yielding less than long-term bonds The economy is expanding too rapidly Long-term bonds are yielding more than short-term bonds Short-term bonds and long-term bonds are moving toward parity

Short-term bonds are yielding less than long-term bondsLong-term bonds are yielding more than short-term bonds

The prices of which of the following bonds would change the LEAST if interest rates rose?

Short-term municipal notes

Which of the following is a measure of risk according to the Modern Portfolio Theory?

Standard deviation

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

An investor who believes in the inherent efficiency of the markets would be least likely to adopt which of the following strategies?

Tactical asset allocation

Doug's portfolio is currently allocated in the following manner: 60% stocks, 30% bonds, and 10% cash. However, Doug believes that significant correction is imminent in the stock market since the Federal Reserve Board is going to raise interest rates. Doug decides to change his allocation to 30% stocks, 30% bonds and 40% cash. Doug's reallocation decision is an example of which of the following types of investing?

Tactical asset allocation

An advisory firm is evaluating an investment opportunity for a client. Current projections show that the net present value (NPV) is equal to zero and the client requires an internal rate of return of 6%. Based on this given information, what is the investment's internal rate of return (IRR)?

The IRR is equal to 6%

What theory states that investors are basically risk-averse and that, if presented with two investments offering the same expected return, they would prefer the less risky one?

The Modern Portfolio Theory

Which of the following is a valuation model used to calculate the anticipated return for a portfolio of securities?

The expected rate of return

An investment's discount rate is 10% and it has a positive NPV. Based on this information, which of the following is TRUE?

The investment's rate of return is greater than 10%.

A broker-dealer owns 100 shares of ABCO stock which it purchased at 28. If the stock is sold to a customer, the broker-dealer will base the markup on:

The lowest offer on the Nasdaq system

A company's market capitalization (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

If an investment adviser recommends that its clients diversify their investments by purchasing gold coins, gold certificates, or gold futures, which of the following risks is the adviser trying to avoid?

The risk of some investments losing value or performing poorly due to inflation

Which of the following statements BEST describes discounted cash flow?

The total value of an investment's anticipated cash flows in today's dollars

A client requests that her agent display a quote in a thinly traded security. The client is the majority shareholder in this security and the broker-dealer honors the request and displays the quote. Which of the following statements is TRUE?

This would be permissible if the broker-dealer believed the quote was bona fide

Why would an investor use a dollar cost averaging strategy to purchase bonds? To ensure that the average cost per bond is less than the average of the prices at which the bonds were purchased To ensure a profit on the bonds when they are sold To reduce timing risk in volatile markets To reduce systematic risk in markets that lack volatility

To ensure that the average cost per bond is less than the average of the prices at which the bonds were purchased To reduce timing risk in volatile markets

Which of the following is a leverage ratio?

Total Debt/Total Equity

How do mutual funds report annual returns?

Total Return

A client calls an investment adviser representative to discuss a stock she is interested in purchasing. The stock has a low P/E ratio, a high dividend payout ratio and its issuer has a large amount of cash reserves. What type of stock is it?

Value

Modern Portfolio Theory (MPT) defines risk as the:

Variability of expected returns about the mean