Unit 7 Economic Factors Study questions

ID: 40696 A security that your client has been following has a historical average annual return of 11% and a standard deviation of 6%. Knowing this, it would be expected that 95% of the time, your client could expect a return within the range of: A) −1% and +23%. B) −66% and +66%. C) −7% and +30%. D) +5% and +17%. Your answer, +5% and +17%., was incorrect. The correct answer was: −1% and +23%. 95% of the time, a stock will range within 2 standard deviations of its historical return. In this case, 2 times 6% means that the range will be down 12% from the historical 11% and up 12% from the historical 11%. Reference: 7.6.2 in the License Exam Manual.

95% of the time a stock will range within 2 standard deviations of its historical return 2 x 6% means that the range will be down 12% from the historical 11% and up 12% from the historical 11%

Which of the following is NOT related to the variability of a portfolio's returns? A) Asset allocation. B) Total return. C) Market timing. D) Security selection. Your answer, Security selection., was incorrect. The correct answer was: Total return. Let's analyze the question. A portfolio's future returns can vary, that is, fluctuate based on investment decisions made by the investor or adviser. The way the portfolio assets are allocated between different classes of securities will have an impact on the returns. Same is true with the timing of purchases or sales (buying stock when bad economic news is announced is probably not a good time). Finally, the specific securities selected will certainly impact the returns of the portfolio. That leaves total return. Total return is a measurement of the investor's past return on the portfolio. It measures what has happened and has no effect on future variability. Reference: 7.5.2.2 in the License Exam Manual.

Total return is not related to the variability of a portfolio's returns allocation affects variability timing affects variability market affects variability specific securities affect variability total return is past performance, no effect on future

If the value of the U.S. dollar decreases: domestic goods become more competitive. domestic goods become less competitive. foreign goods become more competitive. foreign goods become less competitive. A) II and III. B) I and III. C) I and IV. D) II and IV. Your answer, I and III., was incorrect. The correct answer was: I and IV. When the U.S. dollar decreases against other currencies, foreign goods become more expensive, whereas our domestically produced goods are cheaper for those buying with foreign currencies.

careless dollar decreases domestic goods are cheaper foreign goods are more competitive

XYZ Corporation has a beta of 1 and ABC has a beta of 1.4. XYZ has returned 12% and ABC 14.8%. Based on this information, ABC had alpha of A) 14.8% B) 2.8% C) 2% D) -2% Your answer, 2.8%, was incorrect. The correct answer was: -2% Alpha is the extent to which a security's performance exceeds (or falls short of) what would be expected based on its beta. A stock with a beta of 1.4 would be expected to perform 40% better in an up market than one with a beta of 1.0. Because XYZ with a beta of 1.0 gained 12%, ABC should return 140% of that or 16.8% (12% x 1.4). With an actual return of 14.8%, ABC underperformed the expected by 2% and that is why it has a negative alpha.

negative alpha would have expected 16.8% 12% x 1.4 actual 14.8% --2% alpha

uestion 2 of 30 ID: 240440 According to the efficient market hypothesis, information found when reading the Wall Street Journal would be considered A) semi-strong form market efficiency B) random walk C) strong-form market efficiency D) weak-form market efficiency Your answer, semi-strong form market efficiency, was incorrect. The correct answer was: weak-form market efficiency The closer to inside information, the stronger the information. Anything published in widely read media would be considered very weak. Reference: 7.4.6.1.1 in the License Exam Manual.

weak form is farthest from insider information

A) Beta B) Standard deviation C) Alpha D) Correlation coefficient Your answer, Beta, was incorrect. The correct answer was: Standard deviation The CML provides an expected return for a portfolio based on the expected return of the market, the risk-free rate of return, and the standard deviation of the portfolio in relation to the standard deviation of the market. The equation for the CML uses the: expected return of the portfolio; risk-free rate; return on the market; standard deviation of the market; and standard deviation of the portfolio.

CML uses standard deviation of market and portfolio, expected return of the portfolio, risk free rate, return on the market

Over the past 5 years, a stock has had returns of +16%, +5%, -4%, +12% and +8%. The mid-range value of this stock's returns is: A) +6.0%. B) +8.2%. C) +9.0%. D) +7.4%. Your answer, +7.4%., was incorrect. The correct answer was: +6.0%. The range of a stock's performance is the low to the high, in this case, -4% to +16%. The mid-range is that number that is exactly in the middle of the range. With a range of 20 points, the midpoint is going to be the high minus 10 or the low plus 10. +6.0% is 10 points higher than the low and 10 points lower than the high. Reference: 7.5.2.11.5 in the License Exam Manual.

low to high range -4% to 16% = 20% the midpoint is going to be the high minus 10 or the low plus 10. 6% is 10 points higher than the low and 10 points lower than the high.

The registration requirements of the Securities Act of 1933 would not apply to which of the following? Stocks and bonds issued by insurance companies. Fixed annuities and other fixed insurance contracts. Securities issued by foreign governments. A) I only. B) III only. C) II and III. D) II only. Your answer, II and III., was incorrect. The correct answer was: II only. Securities issued by insurance companies and foreign governments are not exempt under the Securities Act of 1933. However, the registration requirements would not apply to non-security products, such as fixed annuities.

registration requirements of 1933 do not apply to fixed annuities securities issued by insurance companies and foreign governments are not exempt under the Securities Act of 1933

If an investor buys a utility stock with a stable 5% dividend, and after a year the investor's total return in the stock is 10%, the most likely reason for this is the: A) company doubled its dividend payment. B) the stock appreciated by 5%. C) investor reinvested the quarterly dividends. D) stock price declined. Your answer, stock price declined., was incorrect. The correct answer was: the stock appreciated by 5%. The most likely cause for the total return was an increase in the stock price. Reference: 7.5.2.2 in the License Exam Manual.

total return increase is due to a stock price increase

estion 9 of 30 ID: 40944 Section 15 of the Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that: no contract may be terminated with more than 60 days notice in writing. the initial contract is for a maximum of 1 year and then may be renewed on either an annual or biannual basis. unless a specific exemption applies, the fund may not engage in margin trading. the contract must be in writing. A) I and III. B) I and IV. C) II and IV. D) II and III. Your answer, II and IV., was incorrect. The correct answer was: I and IV. Contracts between funds and their advisers may not be terminated with more than 60 days notice and these contracts must be in writing. The initial contract is for a 2-year period and then renewed on an annual basis. Whether the fund can trade on margin is not a function of the management contract. Reference: 8.10.9 in the License Exam Manual.

IA and customer accounts may not be terminated with more than 60 days notice must be in writing initial contract is for 2 years, renewed annually. margin trading not relevant

Under the Investment Company Act of 1940, purchases by which of the following are eligible for the reduced sales charges applicable at the fund's stated breakpoints? A qualified retirement plan. The combined purchases of a man and a custodial account for his daughter where his wife, not he, is the custodian. Two friends who have pooled their money to make a large purchase. An investment club. A) I and II. B) II and IV. C) III and IV. D) I and III. Your answer, III and IV., was incorrect. The correct answer was: I and II. Investment clubs and otherwise unaffiliated groups may not pool their money to receive a breakpoint. Incorporated or otherwise affiliated entities, such as spouses or a parent and minor child, may do so. The fact that the custodian of the daughter's account is the spouse does not change things Reference: 8.10.10 in the License Exam Manual.

qualify for breakpoints may not qualify if pooled or unaffiliated groups qualified retirement plan and combined spouse and affiliated may

Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of: A) the majority vote of the outstanding shares and a majority of that portion of the board of directors that are considered noninterested members. B) the majority vote of the noninterested directors. C) the majority vote of the outstanding shares. D) the majority vote of the board of directors. Your answer, the majority vote of the board of directors., was incorrect. The correct answer was: the majority vote of the outstanding shares and a majority of that portion of the board of directors that are considered noninterested members. The investment adviser's contract must be initially approved by a majority vote of the outstanding shares and a majority of the noninterested members of the board of directors. It is renewed annually by either a majority of the board or a majority of the outstanding shares. In addition, as with all contracts, initial and renewal, it requires a majority of the noninterested board members. Reference: 8.10.9 in the License Exam Manual. Continue

retention of IA for mutual fund only with majority vote of outstanding shares and a majority portion of the board of directors that are considered non interested