CFP Book 3 - QBank Questions

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A $1,000 U.S. Treasury note maturing in eight years is selling for $938.12. The semiannual coupon payment is $35. What is the yield to maturity (YTM) for the note? A) 6.26% B) 8.33% C) 8.06% D) 4.03%

Assets with expected returns that lie above the security market line (SML) A) are overvalued. B) are valued correctly. C) are undervalued. D) should be sold.

Assume a 3-year, $1,000 par value corporate bond is currently trading for $959.53. The bond has a coupon rate of 4% (paid once per year) and a yield to maturity of 5.50%. Calculate the duration for this bond. A) 1.4418 years B) 3.4680 years C) 2.8835 years D) 3.5871 years

Assume an investor has purchased a bond with the following characteristics: Seven years to maturity $1,000 face value 6% annual coupon (paid semiannually) 8.43% current yield $711.74 current market price Which of the following is the bond's yield to maturity? A) 9.83% B) 6.13% C) 4.92% D) 12.25%

Barbara, a Louisiana resident, is in the 35% marginal federal income tax bracket and the 6% marginal state income tax bracket. Select the bond that would provide Barbara with the highest after-tax rate of return. A) Texas municipal bond with a coupon rate of 5.8% B) U.S. Treasury bond with a coupon rate of 6% C) Louisiana municipal bond with a coupon rate of 5.5% D) Corporate bond with a coupon rate of 8%

Companies A and B have exactly the same dollar amount of assets and net income. Company A has a capitalization structure of 70% equity and 30% debt; Company B has a capitalization structure of 40% equity and 60% debt. Which one of these statements is CORRECT? I. Company B has a higher ROE than Company A. II. Company B has a higher ROA than Company A. III. Company A has a higher debt-to-equity ratio than Company B. A) II only B) I only C) III only D) None of these

Select a benefit of investing in foreign markets. A) Portfolio rebalancing B) Diversification C) Currency fluctuations D) Reinvestment rate risk

Select the repayment period that subjects the investor to least amount of interest rate risk. A) Tranche Z B) Tranche A C) Tranche C D) Tranche B

Stock TTY has a mean return of 11% and a standard deviation of 5%. What is the probability of a return of less than 6%, assuming a normal distribution of returns? A) 16% B) 68% C) 50% D) 84%

The current yield of an 8% coupon bond, maturing in five years, and selling currently for $850 is A) 6.73%. B) 9.41%. C) 10.14%. D) 8.56%.

The duration of a bond is inversely related to its A) rating by independent evaluation services. B) term to maturity. C) coupon rate. D) par value.

The duration of a zero-coupon bond is A) greater than the bond's maturity. B) less than the bond's maturity. C) equal to the bond's maturity. D) equal to zero.

Which of the following risks is specific to international investing? A) Reinvestment rate risk B) Exchange rate risk C) Business risk D) Event risk

A money market mutual fund manager recently purchased negotiable, short-term, unsecured promissory notes issued by a number of large corporations for the portfolio. Select the type of investment the money manager purchased. A) Commercial paper B) Repurchase agreements C) Reverse repurchase agreements D) Banker's acceptances

A firm declares a $3.00 cash dividend to its shareholders. The firm has issued dividends of only $0.07 per share for each of the last 15 quarters, and market analysts anticipate a similar dividend this quarter. In an efficient market, one would expect A) a price decrease after the announcement. B) no price change before or after the announcement. C) a price increase before the announcement. D) a price change upon the announcement.

A $1,000 bond may be converted into common stock at $40 per share. The current market price of the stock is $35 per share. The bond matures in 15 years, has a 7% coupon, and a current market price of $914. The current interest rate paid on comparable debt is 8%. Calculate the conversion value of the bond and determine which of these statements are CORRECT. I. The bond is selling at a premium over its conversion value. II. The bond should be converted because its conversion value is less than its value as a bond. III. The bond should not be converted because its conversion value is less than its value as a bond. IV. The market price of the stock will increase as the market price of the bond increases. A) I and III B) I and II C) I, III, and IV D) I only

A fund that invests in both U.S. stocks and international stocks is called A) an international fund. B) a balanced fund. C) a global fund. D) an asset allocation fund.

All of these positions are used to create a zero-cost collar except A) writing a call option on the stock. B) purchasing a put option on the stock. C) a long position in the stock. D) purchasing a call option on the stock.

A Japanese bank has decided to use some of its U.S. dollar reserves, resulting from the U.S. merchandise trade deficit with Japan, to invest in U.S. Treasury bonds. The U.S. Treasury securities pay approximately 6% interest, compared to 2% interest paid on Japanese bonds. For the Japanese bank to retain at least this differential in interest income, which of these situations in the foreign exchange market would have to occur? A) The yen would have to depreciate or remain steady relative to the dollar during the holding period of the bond. B) The yen would have to appreciate relative to the dollar and interest rates in the United States would have to fall. C) The yen would have to depreciate relative to the dollar and interest rates in the United States would have to rise. D) The yen would have to appreciate relative to the dollar during the holding period of the bond.

A bond has a current yield to maturity (YTM) of 3.80%. Market interest rates are expected to rise to 4.50% soon. The bond has a duration of 5.5 years. Calculate the estimated price change of the bond. A) -2.18% B) +3.50% C) +0.70% D) -3.71%

A call option with an exercise price of $105 is selling in the open market for $4.25 when the market price of the underlying stock is $102. What is the intrinsic value of this option? A) $0 B) $4.25 C) $3.00 D) -$3.00

A client has $12,000 of capital gains and $15,000 of capital losses. How much unused loss is carried forward to the following tax year? A) $3,000 B) $0 C) $12,000 D) $15,000

A client has $40,000 in cash in a money market that she would like to invest in the stock market, but she is concerned that the market might not have hit bottom. You have convinced her of the merits of investing for the long term and she has decided to use a systematic approach to investing in mutual funds. She has decided that after her initial investment of $5,000, she will invest $4,000 at the end of each quarter provided that the NAV of the fund is less than her cumulative average cost basis. This is an example of which of the following strategies? A) Averaging up B) Averaging down C) Dollar cost averaging D) Share averaging

A client is considering the purchase of a $25 par preferred stock to add income to his portfolio. The stock has an 8% stated annual dividend rate and will never change. The investor's discount rate is 12%. What is the most the investor should pay for this stock? A) $3.20 B) $16.67 C) If the required return exceeds the coupon rate, another valuation method must be used. D) The value cannot be determined without an appropriate growth rate.

A client of yours, George, wants to maximize his return on an intermediate-term bond that he plans to hold until maturity. You have gathered information on the following two bonds, both of which have a $1,000 par value. Bond 1: A rated; coupon rate of 6%; matures in 6 years and pays interest semiannually; currently selling for $850; duration is 5.16 years. Bond 2: A rated; coupon rate of 10%; matures in 8 years and pays interest semiannually; currently selling for $1,100; duration is 7.15 years. Which of these bonds would you recommend to George and why? I. Bond 1 because it has a higher yield to maturity than Bond 2 II. Bond 2 because its higher coupon rate gives it a superior total return to Bond 1 III. Bond 2 because it has a higher duration than Bond 1 A) II and III B) II only C) I only D) III only

A convertible bond has a par value of 1,000, a current market value of $1,200, and an investment value of $1,050. The bond is convertible into 25 shares of common stock. What is the investment premium of this bond? A) $100 B) $150 C) $75 D) $200

A convertible bond's market value will NOT fall below its A) downside value. B) investment value. C) call value. D) conversion value.

A distribution that is more peaked than normal is A) leptokurtic. B) skewed. C) convex. D) platykurtic.

A standard deviation of 14% means an investor can expect a return on an investment to vary ±14 from the average return approximately _____% of the time.

A wash sale for tax purposes occurs when a person sells a security and repurchases it within ___ days before or after the sale. A) 60 B) 90 C) 61 D) 30

All of these statements concerning the use of the correlation coefficient in reducing portfolio risk are CORRECT except A) combining two securities with perfect negative correlation provides no portfolio risk reduction. B) combining two securities with zero correlation (statistical independence) reduces portfolio risk, but cannot eliminate it. C) because securities typically have some positive correlation with each other, risk can be reduced, but seldom eliminated. D) combining securities with perfect positive correlation provides no portfolio risk reduction.

ABC Corporation has a P/E ratio of 5.00 and an expected growth rate in earnings for the next year of 9.5%. Assuming an investor's required rate of return is 12%, calculate the firm's PEG ratio. A) 0.5263 B) 0.8333 C) 0.1667 D) 0.4167

ABC Corporation has issued a 30-year callable bond with a 5.75% coupon at par. The current market price of the bond is $989.50. Calculate the current yield of this bond. A) 5.75% B) 2.91% C) 5.81% D) 5.69%

ABC Corporation issued bonds with a 10-year maturity, $1,000 par value, and 7% coupon rate (paid semiannually). Two years after issue, interest rates on similar bonds fell to 5.75%. What price should ABC Corporation bonds sell for in the secondary market? A) $1,057.50 B) $1,217.39 C) $942.50 D) $1,079.26

ABC Corporation pays a current annual dividend of $0.75 per share. This dividend is expected to grow at a 30% rate per year during Years 1 and 2. After Year 2, the company's dividend is expected to grow at a constant rate of 8%. What is the value of the stock today, assuming a required rate of return of 10%? A) $54.64 B) $58.81 C) $56.57 D) $58.50

ABC stock is subject to all the following risks except A) default risk B) market risk C) business risk D) financial risk

ABC stock is subject to which of the following risks? A) Business risk B) Financial risk C) All of these D) Market risk

According to Markowitz, an investor's optimal portfolio is determined when the investor's A) lowest indifference curve is tangent to the efficient frontier. B) indifference curve meets the efficient frontier. C) indifference curve crosses the efficient frontier. D) highest indifference curve is tangent to the efficient frontier.

According to the unbiased expectations theory of interest rates, A) the current long-term rate is the average of today's short-term rate and expected future short-term rates. B) yields are a function of the supply and demand of funds in each maturity segment of the market. C) investors require a higher yield on long-term bonds because they are riskier. D) an upward sloping yield curve indicates that investors require a yield premium to invest in long-term securities.

Acme Electric Company announces a cash dividend of $0.50 per share on August 5, to be paid on September 20, the payable date. The company also announces that the record date will be August 25. Bob Johnson purchases 100 shares of Acme on August 24. Based on this information, choose the CORRECT statement regarding the dividend payment. A) Bob will not receive the dividend, because he purchased the shares after the announcement date. B) Bob will not receive the dividend, because he did not purchase the shares before the ex-dividend date. C) Bob will receive the dividend, because he purchased the shares before the ex-dividend date. D) Bob will receive the dividend, because he purchased the shares before the record date.

Adam is trying to evaluate the performance of his portfolio on a risk-adjusted basis. He has a nondiversified portfolio of large-cap stocks. He knows there are different measures of risk-adjusted performance and is not sure which one to use. Which of the following is the most appropriate measure to use? A) Sharpe, because it is used to compute alpha by comparing the Sharpe ratio for a portfolio with the Sharpe ratio for the S&P 500. B) Sharpe, because when a portfolio represents the entire investment fund, standard deviation is a better measure of risk. C) Treynor, because when a portfolio represents one subportfolio of a large diversified portfolio, beta is a better measure of risk. D) Jensen, because it compares a portfolio's return to that of a market index.

Advantages of investing in exchange-traded funds (ETFs) include all of the following except A) ability to sell short. B) daily pricing. C) low expense ratios. D) tax efficiency.

Advantages of unit investment trusts include which of these? I. Stable periodic income II. Diversification III. Active management of the portfolio A) I and III B) II and III C) I and II D) I, II, and III

All of these statements correctly describe the price-to-earnings divided by growth (PEG) ratio except A) companies with a lower PEG ratio have higher expected rates of return. B) PEG is used to compare companies with different growth rates. C) PEG is an indication of how much an investor is paying for a specific revenue stream. D) PEG is calculated by dividing a firm's P/E ratio by the firm's expected growth rate of earnings.

After suffering an unexpected job loss and losing a $125,000 annual salary, your client, Joe, comes to you to review his asset allocation. In addition to possibly having a prolonged unemployment period, Joe, age 62, would like to retire within eight years. He is concerned about the allocation of the Section 401(k) plan at his prior employer which is 100% invested in an S&P 500 Index fund. The balance of the account is $2,500,000. Based on this information, what should you do next? A) Recommend Joe apply for early Social Security benefits to provide him with income during his job search. B) Have Joe complete any necessary paperwork to transfer his 401(k) plan assets to an IRA. C) Tell Joe to focus on finding a job and not be concerned with his asset allocation. D) Discuss Joe's risk tolerance and make appropriate changes to his plan's asset allocation.

Alex owns a put option with an exercise price of $51. The underlying stock is currently trading at $48 in the secondary market. Assuming the put option is currently trading at $6 and has three months until expiration, calculate the intrinsic value of the put option. A) -$600 B) $100 C) -$400 D) $300

All of the following affect an investor's risk tolerance except A) family situation. B) investment time horizon. C) years of experience with investing in the markets. D) tax bracket.

All of the following are features of limited partnerships except A) the general partner controls the business activities of the partnership. B) the general partner determines when distributions are made to the limited partners. C) the limited partners have limited liability. D) the limited partners may participate in the management of the partnership.

All of the following are primary factors in the arbitrage pricing theory (APT) except A) inflation rate. B) unemployment rate. C) changes in GDP. D) interest rates.

All of the following are risks associated with hedge funds except A) long selling. B) higher risk investments. C) lack of transparency. D) leverage.

All of the following correctly describe disadvantages of cash and cash equivalents except A) the rate of return on passbook savings accounts is relatively low when compared to higher risk alternatives such as government bonds. B) investments in money market mutual funds are not insured or guaranteed by the U.S. government. C) investors choosing to redeem their certificates of deposit (CDs) prior to maturity may be subject to a substantial penalty. D) an investor may quickly convert a money market deposit account to cash to meet short-term needs.

All of the following correctly explain advantages of investing in real estate investment trusts (REITs) except A) diversification. B) liquidity. C) tax deferral. D) professional management.

All of the following illustrate a characteristic of a Monte Carlo simulation except A) the user gets a best-case scenario and a worst-case scenario. B) the simulation provides insight into the range of outcomes. C) a clearer understanding of short-term and long-term risk can be gained. D) large changes in the projected rate of return will make small differences in the outcome.

All of the following statements concerning market efficiency are correct except A) an efficient market is one in which the prices of securities quickly and fully reflect all available information. B) the weak form of market efficiency involves market data, whereas the semistrong involve the assimilation of all public information and the strong form involves both public and and private information. C) investors usually react slowly to new and random information pertaining to securities markets. D) the efficient market hypothesis states that securities markets are efficient, with the prices of securities reflecting their current economic value.

All of the following statements correctly describe a type of money market instrument except A) banker's acceptances are short-term drafts drawn on major banks to finance imports and exports. B) Eurodollars are Eurodollar-denominated deposits maintained at banks within the United States. C) negotiable CDs are deposits of $100,000 or more and are traded in the open market. D) commercial paper is a short-term, unsecured promissory note issued by large firms and offers a nominally higher yield than T-bills.

All of the following statements correctly describe certificates of deposit (CDs) except A) CDs are commonly referred to as time deposits. B) CDs typically pay a variable interest rate. C) redemption prior to maturity typically results in an early withdrawal penalty. D) CDs are eligible for FDIC coverage.

All of the following statements correctly explain the core and satellite approach to investing except A) the core portion of the portfolio uses an active investment philosophy to achieve above-market returns. B) the core and satellite investment strategy has the client invest in both broad market indexes (core) and higher-risk alternatives (satellite). C) one goal of this strategy is to reduce portfolio risk through diversification. D) core investments may include U.S. stocks, U.S. fixed-income, and developed international equities

All of the following statements correctly illustrate bond relationships except A) higher-rated bonds have more price volatility than lower rated bonds. B) everything else being equal, the larger the coupon, the shorter the duration. C) bonds with longer durations are more affected by interest rate changes than bonds with shorter durations. D) long-term bonds are more affected by interest rate changes than short-term bonds.

All of the following statements correctly illustrate convexity and duration relationships except A) convexity has an inverse relationship with the coupon rate. B) convexity has a direct relationship with the yield to maturity. C) duration has an inverse relationship with the yield to maturity. D) duration has an inverse relationship with the coupon rate.

All of the following statements describing diversification are correct except A) to reduce liquidity risk, one would keep a sufficient portion of assets in cash or cash equivalent assets. B) to minimize business risk, one could allocate among a number of asset categories and purchase mutual funds. C) to minimize interest rate risk, one could diversify within the fixed-income asset category by staggering bond maturity dates. D) diversification is not enhanced by the addition of foreign securities to a portfolio because they are always highly correlated with domestic equity.

All of these statements correctly describe yield curves except A) a positive yield curve can signal an upcoming economic recession. B) a normal yield curve occurs during periods of economic expansion and generally predicts that market interest rates will rise in the future. C) an inverted yield curve occurs when the Federal Reserve has tightened credit in an overheating economy. D) a flat yield curve occurs when the economy is peaking and, therefore, no change in future interest rates is expected.

All of these statements correctly explain warrants except A) a warrant differs from a traditional option security in terms of maturity. B) issuing a bond with an attached warrant may permit the corporation to increase the coupon rate to entice investors to make the investment. C) a warrant is a long-term call option issued as a sweetener with a new bond issue. D) a warrant typically has a maturity date of several years.

All of these statements correctly identifies a separately managed account except A) a separately managed account holds a diversified portfolio of securities managed by a professional money manager. B) in a separately managed account, the investor owns 100% of the securities in the account. C) one advantage of a separately managed account is the ability to maintain an individual cost basis in the securities held in the account. D) a separately managed account is a privately offered pool of capital for wealthy, sophisticated investors.

All of these statements explain the attributes of technical analysis except A) technical analysts rely heavily on financial ratios in their analysis of stocks. B) technical analysts use terms such as "trendline," "support," and "resistance" in analyzing stocks. C) technical analysts attempt to predict the future movement of stock prices based on past trends. D) technical analysts rely on charts to predict the future prices of stocks.

Amanda buys 75 shares of BR Enterprise stock for $67 per share on margin. The initial margin is 55%, and the maintenance margin is 40%. Calculate the market price at which Amanda will receive a margin call. A) $56.95 B) $50.25 C) $21.54 D) $33.00

Amelia is considering buying shares of HSO stock valued at $50 per share. She forecasts the stock to trade in excess of $75 per share over the next three years. During this time, she expects to receive annual dividends of $4.50 per share. Given a 10% required rate of return, calculate the intrinsic value of the stock. A) $46.50 B) $29.50 C) $45.00 D) $50.00

An active bond management strategy, where one bond is swapped for another bond with similar characteristics but a higher yield to maturity, is considered A) an intermarket spread swap. B) a pure yield pickup swap. C) a rate anticipation swap. D) a substitution swap.

An analysis of the monthly returns for the past year of a mutual fund portfolio consisting of two funds revealed the following statistics: Fund A - Fund B Total return: 18% - 11% Standard deviation: 24% - 17% Percentage of portfolio: 35% - 65% Correlation coefficient (R): .27 What is the standard deviation of the portfolio? A) 17.17% B) 15.58% C) 19.21% D) 19.45%

An analysis of the monthly returns for the past year of a mutual fund portfolio consisting of two funds revealed these statistics Fund A Fund B Total return: 12%, 15% Standard deviation: 9%, 26% Percentage of portfolio: 35%, 65% Correlation coefficient (R): 0.32 What is the coefficient of determination (R2) of Fund A and Fund B? A) 0.15 B) 0.90 C) 0.17 D) 0.10

An analyst's report on Derjet Industries has provided the following corporate information: Total assets: $100,000,000 Total equity: $50,000,000 Net income: $12,500,000 Earnings per share: $3.50 P/E ratio: 2.2 Dividend growth rate: 1.65% Assuming an investor has a required rate of return of 15%, calculate the maximum price that should be paid for this stock in the secondary market. A) $25.83 B) $14.38 C) $35.46 D) $7.70

An individual with a short-term investment time horizon would choose what type of bonds when interest rates are expected to rise? A) Short-term bonds B) Low-coupon, long-term bonds C) High-yield bonds D) Long-term bonds

An investment, such as an option, whose value is based on that of another security is classified as A) an equity. B) a derivative. C) a collectible. D) a tangible asset.

An investor buys 100 shares of stock at $75 per share, with a 60% initial margin requirement and 40% maintenance margin requirement. Assuming the stock quickly falls to $40 per share, calculate the additional capital that the investor must provide to cover a margin call. A) $200 B) $600 C) $400 D) $800

An investor fearing a bear market would hedge his or her position by A) writing a put. B) buying a put. C) selling a put. D) buying a call.

An investor has a portfolio diversified among many different asset classes. If there was an immediate need for cash, which of the following would probably be the most liquid? A) CDL Common Stock Mutual Fund B) XYZ International Stock Mutual Fund C) QRS Money Market Mutual Fund D) Cash value from a universal life insurance policy

An investor is deciding whether to make an investment in LKJ stock, which has a standard deviation of 4.3% and an expected return of 13%, or FDS stock, which has a standard deviation of 5.6% and an expected return of 10.5%. Using the coefficient of variation (CV), which of the following is the preferable investment choice? A) FDS, with a CV of 0.5333 B) LKJ, with a CV of 0.3308 C) FDS, with a CV of 3.0232 D) LKJ, with a CV of 1.8750

An investor is researching a mutual fund. Last year this fund had a total return of 12% when the stock market had a 10% return. This fund has a beta of 1.2 and a standard deviation of 14%. The risk-free rate of return is 5%. What is the Sharpe ratio for this fund? A) 0.05 B) 0.50 C) 0.62 D) 0.11

An investor who is interested in developing a portfolio of collectibles should probably do which one of these? A) Buy relatively inexpensive collectibles B) Diversify over a variety of types of collectibles C) Specialize in a type of collectibles D) Avoid buying through knowledgeable dealers

An investor who makes the assumptions that security prices reflect all available information, that organized exchanges can execute trades rapidly, that security prices change rapidly in response to new information, and that security prices follow random patterns is a believer in A) the efficient market hypothesis. B) the constant growth hypothesis. C) the capital asset pricing model. D) the arbitrage pricing theory.

An investor who reallocates her portfolio frequently to take advantage of perceived opportunities in other market sectors is using which one of the following types of asset allocation? A) Strategic B) Dynamic C) Tactical D) Passive

An investor would consider converting a convertible bond into common stock if the bond's A) duration exceeds 10 years. B) yield to maturity is less than its conversion premium. C) market price is less than the conversion value. D) yield to call is the same as a comparable municipal bon

Analyzing financial statements of a company and performing industry analysis would be beneficial under which of the following forms of the efficient market hypothesis (EMH)? I. Weak II. Semistrong III. Strong IV. Semiweak A) I and II B) III and IV C) I only D) I, II, and III

Andy owns a yen-denominated bond that matures in 15 years. Andy's bond is subject to which one of these combinations of systematic risk? A) Exchange rate risk and reinvestment rate risk B) Financial risk and purchasing power risk C) Interest rate risk and default risk D) Market risk and business risk

Angela purchased a corporate bond currently selling for $925 in the secondary market. The bond has a coupon rate of 7.75% and matures in 12 years. Which of the following is the yield to maturity on this bond? A) 4.39% B) 8.77% C) 15.50% D) 8.49%

Art and oriental rugs may not be sold through which of the following methods? A) On the NYSE B) At auctions C) Privately D) Through dealers

As a result of a market correction, your client's portfolio mix has changed substantially from the desired allocation. What portfolio management technique could be used to bring the allocation back to the desired mix? A) Indexing B) Replication C) Portfolio rebalancing D) Market timing

Asante stipulated that certain assumptions must be present for the capital asset pricing model (CAPM) to be used. Which of the following statements is NOT one of these assumptions? A) Investors can always borrow and lend money at the risk-free rate of return. B) Investment expenses, such as taxes and transaction costs, are relevant in investment decision making. C) At all times, capital markets are in equilibrium. D) All investors have the same expectations for a given investment.

Assume an investor purchased $10,000 of Fund ABC at the beginning of Year 1. Subsequently, he made investments at the beginning of Years 2, 3, and 4 of $1,000, $5,000, and $8,000, respectively. At the beginning of Year 5, the fund was worth $33,000. What was the internal rate of return (IRR) on this fund? A) 12.79% B) 20.55% C) 14.31% D) 10.08%

Assume that Zephyr stock pays a dividend in the current year of $1.75 per share and that the dividend is expected to grow by 2% per year. Calculate the price of the stock assuming an investor has a required rate of return of 8%. A) $29.75 B) $23.62 C) $29.16 D) $21.88

Assume that the yield curve currently is currently inverted, but you anticipate it will return to a normal yield curve within one year. Assuming you want to maximize the opportunity for capital appreciation, which of the following investment strategies would you recommend for clients, based on the current and anticipated shapes of the yield curves? A) Sell short-term bonds and buy long-term bonds B) Sell intermediate-term bonds and buy short-term bonds C) Sell long-term bonds and buy intermediate-term bonds D) Sell long-term bonds and buy short-term bonds

Assume the nominal return on 30-year U.S. T-bonds is 6.5%, and the inflation rate is 1.75%. Which of the following is the real rate of return on the T-bonds? A) 4.75% B) 3.71% C) 8.36% D) 4.67%

Assuming JHG and DSA stocks have standard deviations of 6.23% and 10.78%, respectively, and a correlation coefficient of 0.17, calculate the covariance between the two stocks. A) 26.76 B) 95.06 C) 25.34 D) 11.42

Assuming Mary earned a 3% return from dividend reinvestment, a 2% return from capital gain reinvestment, and a 9% return from share price appreciation on her mutual fund, calculate her total return. A) 14% B) 5% C) 3% D) 12%

Assuming Von made a $10,000 investment four years ago that presently has a value of $31,500, calculate the geometric mean return over the four-year investment period. A) 33.22% B) 53.75% C) 78.75% D) 57.50%

During his next meeting with his financial advisor, Zachary would like to compare the performance of his international investments against a benchmark. Select the appropriate benchmark to use for this comparison. A) S&P 500 Index B) Wilshire 5000 Index C) Dow Jones Industrial Average D) MSCI EAFE Index

The reason for using a ladder bond strategy is to A) magnify gains. B) lower interest rate risk. C) spread cash flows evenly over a given time horizon to eliminate default risk. D) turn a paper loss into an actual loss.

Based on the following information, which of the following is the expected rate of return for Softco Corporation? Stock's beta: 0.80 Forecasted market rate of return: 15% Risk-free rate of return: 6.5% A) 17.20% B) 8.50% C) 13.30% D) 6.80%

Because Julie considers herself to be a moderate risk investor, which of the following stocks should she choose for her investment portfolio? A) JEM stock with a beta of 0.98 B) GHI stock with a high standard deviation C) XYZ stock with a beta of 2.16 D) ABC stock exhibiting a platykurtic distribution

Beverly owns two stocks with a correlation coefficient of zero. Which of these is CORRECT? A) These stocks are well diversified because they will move in unison. B) These stocks will move independently of each other. C) These stocks are not well diversified because they move in unison. D) These stocks are well diversified because as one stock appreciates in value, the other decreases in value.

Bobby owns ABC stock that has mean return of 10.65%, a beta of 1.12, and a standard deviation of 9.05%. He decides to purchase MEJ stock that has a mean return of 11.5%, a beta of 0.98, and a standard deviation of 12.3%. Assume these stocks are weighted in the portfolio 70% for ABC and 30% for MEJ. Also, these stocks exhibit a covariance of 19.86. Calculate the standard deviation for this two-asset portfolio. A) 1.16% B) 3.23% C) 10.02% D) 7.88%

Bond ABC is selling at par, offers an 8% coupon, and matures in 20 years. The bond has a call feature that allows the issuer to call the bond after 10 years at a price of $1,050. Which of the following statements explains the relationship between the bond's yield to call (YTC) and yield to maturity (YTM)? A) The YTC for Bond ABC is 8.33%, which is more than Bond ABC's YTM. B) The YTC for Bond ABC is 8.00%, which is more than Bond ABC's YTM. C) The YTC for Bond ABC is 8.33%, which is less than Bond ABC's YTM. D) The YTC for Bond ABC is 8.00%, which is equal to Bond ABC's YTM.

Brandon owns ABC mutual fund that has produced the following returns over the past three years: Year 1: 4.7% Year 2: −10.0% Year 3: 6.5% Based on this information, calculate both the arithmetic mean (AM) and geometric mean (GM) returns for this series. A) arithmetic mean: −3.93%; geometric mean: −0.1182% B arithmetic mean: 7.07%; geometric mean: 7.04% C) arithmetic mean: −0.40%; geometric mean: −7.04% D) arithmetic mean: 0.40%; geometric mean: 0.1182%

Brantley recently purchased a new video game system on his credit card. Assuming the nominal annual percentage rate (APR) is 14.95% (compounded daily), calculate the effective annual rate (EAR). A) 15.02% B) 16.12% C) 14.95% D) 13.26%

Brenda is interested in calculating the inflation-adjusted rate of return of a recent investment. Assuming the after-tax return on her investment is 6.25% and the inflation rate is 5%, calculate the inflation-adjusted rate of return. A) 1.19% B) 12.25% C) 1.25% D) 11.25%

Brett bought 500 shares of WCA stock at $27 per share on margin (50% initial margin percentage) with an annual margin interest rate of 5.25%. After one year, he sold the shares for $44 per share. The stock did not pay dividends during his holding period. Calculate Brett's holding period rate of return using margin. A) 120.68% B) 125.93% C) 57.42% D) 60.00%

Brian and Kellie purchased savings bonds for their children's future college education expenses. What series of bonds did they choose if the savings bonds are inflation-indexed and may be used to pay for higher education costs on a tax-favored basis? A) Series HH B) Series I C) Series E D) Series EE

During the past year, the stock market had a return of 8%, while the risk-free rate of return was 3%. Fund B had a realized return of 12%, a standard deviation of 15, and a beta of 1.20. Jensen's alpha for the fund is A) -0.60%. B) 0.40%. C) 3.00%. D) 1.60%.

Choose the form of the efficient market hypothesis that supports technical analysis. A) None of these B) Strong C) Semistrong D) Weak

Choose the risk that is attributable to cash and cash equivalents. A) Purchasing power risk B) Liquidity risk C) None of these because cash and cash equivalents are considered risk-free D) Marketability risk

The risk associated with the amount of debt a company has issued is A) financial risk. B) business risk. C) systematic risk. D) interest rate risk.

CAL stock has a current annual dividend of $1.25 that has been growing at a constant rate of 4.5% per year. Assuming the stock is currently selling for $40, and your required rate of return is 7.5%, should you buy the stock at today's price? A) Yes, because the stock is undervalued. B) No, because the stock is not a good investment on the basis of its variance. C) Yes, because the stock is a good buy on the basis of its risk-return relationship. D) No, because the stock is overvalued.

CCC stock paid a dividend this year of $3, and this dividend is expected to grow at a rate of 10% for the next two years and at a rate of 5% thereafter. Assuming Jackie expects to sell the stock in three years, and her required rate of return is 12%, what is the price she should be willing to pay for CCC stock? A) $37.57 B) $49.25 C) $71.43 D) $43.41

CPM stock is currently trading for $30 per share and has earnings of $1.50 per share. What is CPM's price-to-earnings (P/E) ratio? A) 45 B) 20 C) 5 D) 15

Calculate the estimated change in the price of a bond with a present value of $987.56 and Macaulay duration of 4.8 years when its YTM changes from 7% to 6%. A) +4.49% B) -4.49 C) -4.53% D) +4.53%

Calculate the expected rate of return for a stock with a beta of 2.0 when the risk-free rate is 6% and the return on the market is 12%. A) 12% B) 18% C) 10% D) 24%

Calculate the intrinsic value of a call option that trades at $4, with an exercise price of $35, and has a current underlying stock price of $33. A) $600 B) $0 C) -$200 D) $200

Calculate the present value of a five-year bond with a coupon rate of 5.50% (paid semiannually) if similar quality bonds are currently yielding 4.35%. A) $1,026.97 B) $929.47 C) $1,051.18 D) $950.32

Candi purchases a 30-year zero-coupon corporate bond. The bond was issued by ABC Company, a Fortune 500 company. Her investment is subject to which of these risks? I. Default risk II. Reinvestment rate risk III. Purchasing power risk IV. Interest rate risk A) II and III B) I, II, and III C) I, III, and IV D) I, II, III, and IV

Carly purchased $80,000 of JEM stock for $40 per share utilizing her margin account. She used $40,000 in her money market fund plus she borrowed $40,000 from her broker. She acquired a total of 2,000 shares of JEM stock. JEM stock is currently trading at $39.65 per share. Calculate the stock price that Carly would receive a margin call from her broker. Assume a maintenance margin requirement of 35% and an initial margin requirement of 50%. A) $30.23 B) $30.77 C) $29.68 D) $30.50

Carol sells her AA rated 5% YTM bond for $940 and buys a BB-rated 6% bond for $900. Both bonds mature in four years. This transaction illustrates which of these swaps? A) A rate anticipation swap B) An intermarket swap C) A substitution swap D) A pure yield pickup swap

Carolyn owns a corporate bond with a coupon rate of 3.60%. Currently, the inflation rate is 1.50%. Calculate the real rate of return on this bond. A) 3.60% B) 2.07% C) 5.10% D) 2.10%

Choose the CORRECT statement regarding yield curves. A) A flat yield curve occurs when the economy is peaking and, therefore, no near-term change in future interest rates is expected. B) A normal yield curve occurs during periods of economic expansion and generally predicts that market interest rates will rise in the future. C) An inverted yield curve occurs when the Federal Reserve has tightened credit in an inflationary economy. D) All of these statements are correct.

Choose the CORRECT statements concerning the futures market. I. A futures contract is a standardized, transferable agreement providing for the deferred delivery of either a designated commodity or financial instrument (or its cash value). II. Although a buy or sell commitment in futures trading is binding, a buyer or seller can eliminate the commitment by taking an opposite position in the same commodity or financial instrument for the same futures month. A) Both I and II B) II only C) I only D) Neither I nor II

Choose the CORRECT statements regarding option contracts. I. The buyer of a call option has the potential for unlimited gain. II. The seller of a put option is bullish. III. The writer of a naked call is exposed to an unlimited loss. IV. If the writer of a call option owns the underlying stock, the option is considered covered. A) II and III B) I and II C) I, II, III, and IV D) III and IV

Choose the REITs that are used to finance real estate ventures that develop property or finance construction. A) Equity REITs B) Hybrid REITs C) Mortgage REITs D) Government REITs

Choose the agency issue which historically did NOT have an indirect backing and guarantee of the U.S. government. A) Student Loan Marketing Association B) Federal Home Loan Mortgage Corporation C) Government National Mortgage Association D) Federal National Mortgage Association

Choose the statement regarding the correlation coefficient that is NOT correct. A) Perfectly negatively correlated assets have a correlation coefficient of -1.0. B) A correlation coefficient of 0.0 means there is no relationship between the returns of the assets. C) Perfectly positively correlated assets have a correlation coefficient of +1.0. D) Combining assets with less than perfect positive correlation will not reduce the total risk of the portfolio.

Choose the stock value that is defined as the discounted present value based on future cash flows as determined by some form of a dividend discount model. A) Par value B) Intrinsic value C) Market value D) Book value

Chris owns a bond that is convertible into common stock at $38 per share and has a coupon of 6.0%. Interest is paid semiannually. The current market price of the stock is $42 per share. The investment value of the bond is $1,050, and the bond currently sells for a market price of $1,225. Which one of these percentages is closest to the downside risk of this bond? A) 14.29% B) 4.98% C) 18.37% D) 9.80%

Chuck owns a convertible bond that has a conversion price of $40 per share and a coupon of 5.5%. Interest is paid semiannually. The current market price of the stock is $41 per share. The investment value of the bond is $940, and the bond currently sells for a market price of $1,120. What is the downside risk of this bond? A) $180 B) $85 C) $120 D) $95

Connie, 45, has an extensive amount of assets in a separately managed account. The account is mostly compromised of small-cap growth companies. What is the best benchmark to analyze the performance of her account? A) Value Line Index B) Russell 2000 Index C) MSCI EAFE Index D) Wilshire 5000 Index

Consider CPM stock with a current dividend of $1.05 per share and a market price of $46.65 per share. The current dividend is expected to grow for three years at a rate of 2% and then 3% thereafter. Assume the required rate of return is 6%. Using the multistage growth dividend discount model, calculate the intrinsic value of CPM stock. (Round all numbers to the nearest cent.) A) $34.82 B) $41.38 C) $32.00 D) $29.09

Consider the following information for the CPM International Growth Fund: Average annual rate of return: 7.45% Average market rate of return: 8.50% Beta: 1.25 Standard deviation: 4.55% Risk-free rate of return3.50% Select the statement that is NOT correct. A) Jensen's alpha for the fund is -2.30%. B) The Treynor ratio for the fund is 0.0400. C) The fund manager underperformed the market over the given time frame. D) The Sharpe ratio for the fund is 0.8681.

Consider this information regarding two possible investments: Stocks J and K. Stock J: Expected return: 11.5% Standard deviation: 8% Stock K: Expected return: 8.2% Standard deviation: 6% Identify which of these investments you would prefer and why. A) Stock J because it has the lowest coefficient of variation B) Stock K because it has the highest coefficient of variation C) Stock K because it has the least risk D) Stock J because it has the highest expected return

Cosmo has a margin account with a balance of $50,000 with a national broker-dealer. The initial margin requirement on this account is 50%. Cosmo is interested in purchasing shares of Aardvark Inc., which is currently selling at $40 per share. Assuming the maintenance margin is 40%, what would the price of Aardvark be before Cosmo would receive a margin call? A) $16.00 B) $37.50 C) $33.33 D) $24.00

Eight years ago, ABC Company issued a 20-year bond with a 4% coupon rate. Due to a recent decline in market interest rates, the company decided to call the bonds for 103% of par value. Calculate the rate of return for an investor who purchased the bond at issue for par and surrendered it today for the call price. A) 4.10% B) 4.32% C) 4.44% D) 4.00%

Dividend reinvestment plans offer which of these advantages? A) A convenient means to accumulate shares B) An increase in the stock's par value C) A means for the company to repurchase some of its shares D) A means for the company to retain more earnings

DIV Corporation's current market value is $50 million, with 2 million shares outstanding. The board of directors votes to pay a stock dividend of 10%. Which of the following statements is correct? A) DIV Corporation's overall market value will be $55 million following the stock dividend. B) DIV Corporation's per-share stock price will be $22.73 following the stock dividend. C) DIV Corporation's per-share stock price will be adjusted upward following the stock dividend. D) DIV Corporation will have 2 million shares outstanding following the stock dividend.

Distributions of dividend and capital gains in cash to mutual fund investors A) are added to the tax basis of the shares once taxes on the distributions are paid. B) decrease the taxable gain or increase the loss on sale of the shares after taxes are paid. C) are fully taxable to the investor. D) decrease the cost basis of the shares, whether taxes are paid or not.

During a period of increasing inflation, which one of the following investments might be appropriate? A) Common stock of energy firms B) None of these C) Common stock of financial firms D) Long-term bonds

Elayne recently purchased a municipal bond through her stockbroker. The broker told her that the bond is backed by the full faith and credit of the issuer. What type of bond did Elayne buy for her portfolio? A) Revenue bond B) U.S. savings bond C) General obligation bond (GO) D) U.S. Treasury bond

Element Corp had these annual returns over the past four years: +12%, +6%, -8%, and +20%. What is the standard deviation for Element Corp. over the past four years? A) 7.5% B) 11.8% C) 15% D) 12.4%

Ellen is an aggressive investor who is willing to take above-average risk to maximize capital appreciation. She is not interested in current income. The two mutual funds that she has under consideration are the following: Small-Cap Value Fund vs. Small-Cap Growth Fund Current yield: 1.1%, 0.6% Five-year total return: 14.2%, 16.7% Beta: 0.89, 1.14 Sharpe ratio: 1.12, 0.93 Standard deviation: 8.20, 12.60 Alpha: +2.70, +0.40 Which mutual fund is more appropriate for Ellen and why? A) Small-cap value fund, because its risk-adjusted performance statistics are superior B) Small-cap value fund, because its coefficient of variation is higher C) Small-cap growth fund, because growth stocks fit her goal of maximum capital appreciation D) Small-cap growth fund, because its total return is higher

Equity income funds may hold which of these types of securities? I. Income-producing common stocks II. Convertible bonds III. Convertible preferred stocks A) I and III B) I and II C) I, II, and III D) II and III

Equity investments made for the launch, early development, or expansion of a business are known as A) distressed debt investing. B) venture capital. C) leveraged buyouts. D) mezzanine financing.

Exchange-traded funds (ETFs) generally offer which of these? I. Tax efficiency II. Low expense ratios III. Active professional management IV. Marketability A) I, II, III, and IV B) I and II C) I, II, and III D) I, II, and IV

FER stock has a current dividend of $0.75 per share that has been growing at a rate of 1.25% per year. If an investor's required rate of return is 15% and the stock is currently selling for $6.34 per share, determine whether the investor should purchase the stock. A) Yes, the stock is undervalued based on the constant growth dividend discount model. B) No, the stock is overvalued based on the constant growth dividend discount model. C) Yes, the stock is undervalued using the perpetuity dividend discount model. D) No, the stock is not a wise purchase based on the risk-return trade-off.

Financial leverage affects A) return on equity. B) return on equity, earnings per share, and risk to stockholders. C) earnings per share. D) risk to stockholders.

Francis and William would like to place $5,000 into an account that would be used primarily for emergencies. Which of the following investment choices should be recommended for an emergency fund? A) Guaranteed investment contracts B) U.S. Treasury bonds C) Series I savings bonds D) Money market mutual funds

Frank has become very interested in the stock market and enjoys spending his spare time researching companies in the medical field. He believes studying and analyzing the industry, combined with his advanced exposure to trends and new innovations in medicine, will give him an advantage in achieving superior performance in medical stock investment opportunities. Choose the form of the efficient market hypothesis (EMH), if any, that Frank is considered subscribing to. A) Semistrong form B) Strong form C) None of these D) Weak form

Gary Stevens would like to know the weighted beta for his portfolio. He owns 100 shares of ACE common stock with a beta of 1.1 and total current market value of $5,000; 400 shares of BDF common stock with a beta of 0.70 and total current market value of $8,000; and 200 shares of GIK common stock with a beta of 1.5 and total current market value of $10,000. What is the overall weighted beta coefficient for Gary's portfolio? A) 1.13 B) 1.05 C) 1.01 D) 1.22

George Jones owns a convertible bond that has a conversion price of $50 per share and an annual coupon rate of 6.0%. Interest is paid semiannually. The current market price of the stock is $51 per share. The investment value of the bond is $890, and the bond currently sells for a market price of $1,080. What is the downside risk of this bond? A) $210 B) $155 C) $130 D) $190

George has a five-year bond with a coupon rate of 3.65% (paid semiannually). Assuming the comparable yield for this quality bond is 4.85%, calculate the intrinsic value of his bond. A) $1,179.84 B) $1,054.39 C) $1,000.00 D) $947.28

Given a required rate of return of 8%, a growth rate of 4%, a beta of 1.25, and a standard deviation of 2.5%, calculate the price-to-free-cash flow for this particular investment. A) 28.0 B) 26.0 C) 16.6 D) 20.8

Gordon, age 40, wants to invest in a mutual fund that will provide capital appreciation. He wants a fund that will do as well as the overall market and has a low expense ratio, but he does not want to assume a high risk to achieve his objective. He is considering purchasing one of the following mutual funds: Fund A: a growth mutual fund that has a beta of 1.10 and invests in medium- to high-grade common stock Fund B: an index mutual fund that has a beta of 1.00 and invests in common stock that mirrors the S&P 500 Index Which of these funds would best meet Gordon's objective? A) neither alternative is appropriate for his objective B) Fund A, because it invests in lower-risk stocks than Fund B C) Fund B, because it has a beta of 1.00, has low expenses, and is less risky D) Fund A, because it can be expected to outperform the market and has an acceptable level of risk

Grace's portfolio is comprised of 40% U.S. corporate bond fund, 50% U.S. growth and income equity fund, and 10% municipal bond fund. Grace would like to reduce her portfolio's level of risk and maintain or improve return. Which of these could be recommended to Grace to achieve her goal? I. Global equity fund II. Biotechnology sector equity fund III. Louisiana municipal bond fund IV. Emerging market fund A) II, III, and IV B) I only C) I and IV D) III only

Greg buys a call option on LMN Corporation's stock for an option premium of $1.50. Which of these statements is CORRECT? I. Greg hopes that the price of LMN stock will decline. II. Greg's maximum loss on the option is $150. A) Both I and II B) Neither I nor II C) I only D) II only

Greg calls his broker and tells her to sell his XYZ stock if it falls to $20, but he does not want less than $19.50 for his shares. What type of order should his broker recommend to sell the stock? A) Stop limit order B) Limit order C) Market order D) Good-till-canceled order

Harry purchased 100 shares of MNL common stock five years ago at a cost of $4,300. The stock paid the following dividends: Year: Amount: 1 - $180 2 - $180 3 - $200 4 - $225 5 - $230 At the time the fifth-year dividend was paid, Harry sold the stock for $8,900. What was Harry's average annual compound rate of return (IRR) on MNL stock? A) 19.21% B) 9.35% C) 15.66% D) 12.68%

Henry owns a 10-year bond with a coupon rate of 4.85% (paid semiannually). Assuming the comparable yield for this quality bond is currently 5.5%, calculate the intrinsic value of his bond. A) $950.51 B) $847.03 C) $929.67 D) $930.51

The segment of the security trading marketplace that allows for institutional investors to trade with other institutional investors outside of normal trading hours is known as A) the third market. B) the fourth market. C) the primary market. D) the secondary market.

Jack is interested in purchasing LFM stock. LFM has an estimated free cash flow to equity (FCFE) for the next year of $2.75 per share, which is expected to grow at a constant rate of 3.5% per year. Jack's required rate of return is 12%. Using the FCFE valuation model, calculate the intrinsic value of LFM stock. A) $33.48 B) $32.35 C) $81.32 D) $23.71

Jack sells short 200 shares of ABC stock at $38.50 with a 50% initial margin. ABC pays a dividend of $0.50 per share after he sells the stock. Jack then buys back the stock for $32. Calculate his percent gain or loss. A) 16.21% gain B) 33.77% gain C) 16.88% loss D) 31.17% gain

Identify which of these statements regarding revenue bonds is NOT correct. I. They are secured by a specific pledge or property. II. They are a type of full faith and credit bond. III. Their interest is tax-exempt at the federal level. IV. They are analyzed by the project's ability to generate earnings. A) I and III B) III and IV C) II and IV D) I and II

Identify which of these statements regarding rights and warrants is CORRECT. I. Rights provide current common stockholders with the ability to retain their ownership percentage when new shares of stock are issued. II. Warrants are typically attached to new bond issues to attract investors. A) I only B) II only C) Both I and II D) Neither I nor II

In a positively skewed distribution, what is the order (from lowest value to highest) for the distribution's mode, mean, and median values? A) Median, mode, mean B) Mode, median, mean C) Mean, median, mode D) Mode, mean, median

The annual returns of the ABC fund have been +12%. -4%, and +7%. What is the standard deviation of the fund's returns? A) 5.00% B) 7.79% C) 4.04% D) 8.19%

Jack has $50,000 to invest in a portfolio of bonds. He decides to invest $25,000 into bonds with a two-year maturity and $25,000 into bonds with a 10-year maturity. His portfolio illustrates what type of bond strategy? A) Bond bullets B) Bond barbells C) Bond swaps D) Bond ladders

Identify the CORRECT statement concerning international investing. A) The rates of return on foreign securities have always been less than those available from U.S. markets. B) The addition of foreign securities to a portfolio may result in increased portfolio risk due to the different movements of foreign markets and U.S. markets. C) Foreign markets are usually mature and offer no growth advantages. D) Information is not as readily available on foreign investments.

Identify the CORRECT statements regarding warrants. I. Warrants give the owner the right to purchase a specified number of shares for a specified period at a specified price. II. Warrants are typically written with a maturity date of nine months. III. Warrants must include standardized terms required by the Options Clearing Corporation. IV. Warrants are issued by a corporation rather than written by an individual. A) I and II B) I, II, III, and IV C) III and IV D) I and IV

Identify the efficient market hypothesis that suggests an investor can achieve above-market returns by only utilizing insider information. A) Weak B) All of these forms C) Strong D) Semistrong

Identify the entity that issues guaranteed investment contracts (GICs). A) Credit unions B) Open-end investment companies C) Insurance companies D) Commercial banks

Identify the incorrect statement regarding savings accounts. A) They offer a relatively low interest rate B) Accounts are established with a commercial bank or savings and loan C) Depositors are permitted to withdraw their savings at any time without penalty D) They require a minimum balance of $500

Identify the types of bonds that are subject to the most default risk. A) U.S. Treasury bonds B) AA rated general obligation bonds C) U.S. savings bonds D) Junk bonds

Identify the yield-curve theory that relies on the laws of supply and demand for various maturities of borrowing and lending. A) Liquidity premium theory B) Unbiased expectations theory C) Market segmentation theory D) Brownian theory

Identify those risks that pertain to hedge funds. I. Overuse of leverage II. Excessive short selling III. Lack of transparency IV. Lack of regulation A) I, II, III, and IV B) II, III, and IV C) II and III D) I and IV

Identify which of the following statements regarding money market deposit accounts (MMDAs) are NOT correct. I. They are FDIC insured. II. They offer unlimited check writing privileges. III. They are primarily offered by open-end investment companies. IV. They require a minimum balance. A) I and II B) II and III C) I and IV D) III and IV

Identify which of the following statements regarding the risk premiums associated with the capital asset pricing model (CAPM) are CORRECT. I. The stock risk premium is the inducement necessary to entice the individual to invest in a given stock. II. The market risk premium is the incentive required for the individual to invest in the securities market. A) Both I and II B) Neither I nor II C) II only D) I only

Identify which of these is NOT a characteristic of a normal yield curve. A) The curve has a tendency to slope upward and outward. B) A normal yield curve occurs during periods of economic expansion. C) As the maturity date of bonds lengthens, the corresponding bond yield decreases. D) A normal yield curve indicates that long-term market interest rates are higher than short-term rates.

Identify which of these is NOT a source of systematic risk. A) Business risk B) Reinvestment rate risk C) Purchasing power risk D) Market risk

Identify which of these is NOT an unsystematic risk. A) Business risk B) Market risk C) Default risk D) Liquidity risk

Identify which of these methods may be used to trade exchange-traded funds (ETFs). I. Investors can buy or redeem shares from the fund family in lots of 1,000. II. Investors can trade ETFs in the secondary market by using a broker. III. ETFs can be purchased on margin. IV. ETFs may be sold short. A) II, III, and IV B) II only C) I and II D) I and III

Identify which of these statements concerning technical analysis is CORRECT. I. Technical analysis is focused on the process by which stock prices rapidly adjust to new information. II. Technical analysis is based on the underlying fundamentals of a stock's value. III. The focus of technical analysis is market timing with an emphasis on price changes. IV. Technicians concentrate on past stock price movements to forecast future stock price movements. A) I and II B) III and IV C) I, III, and IV D) II only

Identify which of these statements regarding bonds is CORRECT. I. If a bond is issued in registered form, payments will be made to the owner of record. II. If a bond is issued in bearer form, payments will be made to whoever holds or possesses the bond. III. A bond acquired in the secondary market at a discount is called a market discount bond. IV. The amount attributable to a market discount is always includable in income in the year of acquisition. A) I, II, and III B) II and IV C) II, III, and IV D) I only

Identify which of these statements regarding option pricing models is CORRECT. I. The binomial option pricing model assumes that the price of the option will change constantly because the market price of the underlying security also changes constantly. II. The Black-Scholes option valuation model is designed to determine the price of an American call option. III. The Black-Scholes option valuation model assumes that the price of the option will change in discrete increments on the basis of movements (up or down) in the price of the underlying stock. IV. The binomial model assumes the call option being valued has an exercise price of $100. A) I, II, and III B) I and IV C) IV only D) II, III, and IV

Identify which of these statements regarding unit investment trusts (UITs) is CORRECT. I. Units are sold at net asset value plus a commission for the broker executing the transaction. II. Like stocks, UITs are traded on the major exchanges. III. During the term of the trust, unit holders are taxed in the same manner as owners of variable annuities. IV. Upon maturity, the securities are generally liquidated and the proceeds distributed to the investor or trust beneficiaries. A) III and IV B) I and IV C) I and II D) I, III, and IV

Identify which of these statements regarding zero-coupon bonds is NOT correct. I. Zero-coupon bonds are purchased at par and defer interest payments until maturity. II. Because there are no coupon payments for zero-coupon bonds, no current income is recognized. III. A zero-coupon bond is issued at a discount and pays semiannual interest payments. IV. Corporations may favor zero-coupon bonds because they have an extended period to use the money that has been raised by the offering. A) II and III B) IV only C) I and IV D) I, II, and III

If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors in the higher tax brackets, ABC is a(n) A) corporate bond fund. B) aggressive growth fund. C) municipal bond fund. D) money market fund.

If a $100 par value preferred stock pays an annual dividend of $5 and comparable yields are 10%, the price of the preferred stock will be A) $25. B) $50. C) $100. D) $75.

If a U.S. resident buys a Japanese bank stock that subsequently rises in price, while the Japanese currency strengthens relative to the U.S. currency, which of these situations is most likely to occur when the investor sells the stock at a gain? A) The net gain will be increased due to the currency change. B) The net gain will be decreased due to the currency change. C) None of these. D) The net gain will be the same regardless of the currency change.

If a bond is immunized against interest rate risk, a dollar decline in the bond's price, resulting from rising interest rates, will be approximately offset by a dollar increase in the A) bond issuer's common stock. B) price of comparable bonds in the market. C) bond's call price. D) income from coupons reinvested over the investment horizon.

If a mutual fund's beta and standard deviation are expected to decrease in the future, its average annual return and the market average annual return are expected to remain the same, and the risk-free rate is expected to remain constant, which of the following shows the real effect this would have on the following performance measures? Option: Alpha: Sharpe Ratio: A - increase, decrease B - decrease, decrease C - decrease, increase D - increase, increase A) Option A B) Option D C) Option B D) Option C

If an American investor holds foreign securities and is concerned about exchange rate risk, that investor may hedge by A) buying American securities in Europe. B) selling a futures contract for delivery of dollars. C) buying a futures contract for delivery of dollars. D) diversifying the portfolio into many foreign securities.

If an investment has a correlation coefficient of 0.80 with the market, which of the following performance measures is the best measure of risk? A) Sharpe ratio B) Treynor ratio C) Jensen's alpha D) Information ratio

If an investor is looking to purchase bonds that are free from default risk, which of these should be purchased? A) Revenue bonds B) Government bonds C) Corporate bonds D) Municipal bonds

If the intrinsic value of a call option is $3, which of these statements is CORRECT? A) The option is out-of-the-money. B) The option is in-the-money. C) The option is covered. D) The option is at-the-money.

If the market interest rate is 7.27%, the current yield of a bond with a 9% coupon, $1,000 par, selling for $1,120, and maturing in 10 years is A) 9.00%. B) 7.27%. C) 6.49%. D) 8.04%.

Immunization offsets which two risks in a bond portfolio? A) Interest rate risk and reinvestment rate risk B) Liquidity risk and market risk C) Reinvestment rate risk and call risk D) Interest rate risk and default risk

In a financial market A) investors will take an active investment strategy if they are strong believers in the efficient market hypothesis (EMH). B) that is efficient, new information will be slowly reflected in securities prices. C) investors who do not believe in the efficient market hypothesis (EMH) will stop seeking undervalued securities. D) that is efficient, the prices of securities will not differ from their justified economic values for any length of time.

In general, rising interest rates result in which of the following combinations? A) Falling stock and bond prices B) Falling bond prices and rising stock prices C) Rising stock and bond prices D) Rising bond prices and falling stock prices

In order to do an effective job of investment counseling, the investment adviser should examine and review the client's I. financial goals. II. risk tolerance and risk exposure. III. tax situation. IV. liquidity and marketability needs. A) III and IV B) I, II, III, and IV C) I, II, and IV D) I and II

In order to immunize a bond portfolio over a specific investment horizon, an investor would do which of the following? A) Match the maturity of each bond to the investment horizon. B) Match the duration of each bond to the investment horizon. C) Match the average weighted duration of the bond portfolio to the investment horizon. D) Match the average weighted maturity of the portfolio to the investment horizon.

Income or dividends produced by which of the following securities is exempt from federal income tax? A) U.S. Treasuries B) Corporate debt C) Common stock D) Municipal bonds

Indifference curves, which represent the risk-reward trade-off that the investor is willing to make, will I. cross the efficient frontier in two locations. II. lie tangent to the efficient frontier. III. will not intersect the efficient frontier. A) I only B) II and III C) I and II D) I, II, and III

Interest in gold as an investment increases during periods of which of these? A) Deflation B) Economic or political uncertainty C) Economic growth D) Recession

Investors may use P/E ratios and price/sales ratios to value stocks. If this analysis is used, which of the following is desirable? A) A high P/E and a low price/sales ratio B) A low P/E and a low price/sales ratio C) A high P/E and a high price/sales ratio D) A low P/E and a high price/sales ratio

JEM Corporation always pays a dividend of $5.50 per share. Calculate the intrinsic value of the stock assuming a required rate of return of 8% and a risk-free rate of return of 4%. A) $15.94 B) $68.75 C) $137.50 D) $45.83

JEM Technologies, Inc. has assets of $500 million and $50 million in liabilities. For the past year the company earned $125 million, and paid out $50 million in dividends. Calculate the company's return on equity (ROE). A) 52% B) 20% C) 28% D) 38%

JEM stock has a beta coefficient of 1.35 and the market has a rate of return of 8.50%. The 90-day U.S. Treasury bill rate of return is 1.75%. Based on the information provided, choose the CORRECT statements. I. The stock risk premium is 6.75%. II. The market risk premium is 9.11%. III. The expected rate of return is 10.86%. A) I and III B) I, II, and III C) III only D) I and II

Jay has recently learned that foreign investments are a good way to diversify a portfolio. Select which of these statements regarding the risks and benefits of foreign investments, specifically American depositary receipts (ADRs), is CORRECT. A) ADRs are free of exchange rate risk but are subject to market risk. B) Foreign taxes paid on income earned from an ADR are eligible for the foreign tax credit. C) ADRs are receipts for investments placed with foreign mutual funds. D) Because ADRs are only available through private placements, they are relatively illiquid and nonmarketable investments.

Jefferson originally purchased 100 shares of XYZ stock for $45 per share. The stock is currently trading at $60 per share. The stock paid dividends of $2 per share in year 1 and $2.30 per share in year 2 (all paid at year end). If Jefferson has held the stock for two years, what is his holding period return? A) 23.5% B) 42.9% C) 19.0% D) 22.0%

Jensen's alpha is an absolute measurement. What does it tell you? A) The percentage of return that can be attributed to systematic risk B) The percentage by which a manager beat the market C) The percentage a manager over- or underperformed based on the amount of risk taken D) The percentage of return that can be attributed to unsystematic risk

Jim is a paper maker who purchases lumber from tree farmers around his state. Which of these hedge positions should Jim consider if he is concerned with rising lumber prices? A) A long hedge; Jim should sell lumber futures contracts to protect against rising lumber prices. B) A long hedge; Jim should buy lumber futures contracts to protect against rising lumber prices. C) A short hedge; Jim should sell lumber futures contracts to protect against rising lumber prices. D) A short hedge; Jim should buy lumber futures contracts to protect against rising lumber prices.

Jim, 32, and Caren, 30, have been married for seven years. Both Jim and Caren work and have no children, so they have a large amount of disposable income. They live in the suburbs and are planning to purchase a condominium downtown as a weekend getaway. They would like to invest their money in a safe place for the down payment during the six months they spend searching for the perfect location and amenities. Which of the following investments would you recommend to Jim and Caren to accomplish this goal? A) U.S. government income fund B) Money market fund C) Stock index fund D) Investment-grade bond fund

Jonathan purchased 500 shares of CPM stock for $12 per share. At the end of the first year, he made another purchase of 500 shares at a stock price of $12 per share. At the end of the third year, he sold all of the stock for $17 per share. In addition, the stock paid a dividend of 0.35 per share at the end of each year. Calculate the dollar-weighted return to Jonathan over the three-year period. A) 11.63% B) 13.50% C) 15.60% D) 17.46%

Jose owns a 30-year corporate bond, with 22 years remaining until maturity, featuring a coupon rate of 6.25% (paid semiannually). Assuming the comparable yield for this quality bond is currently 7%, calculate the intrinsic value of his bond. A) $1,000.00 B) $916.44 C) $906.46 D) $1,138.38

Juan has an investment portfolio consisting of 30% MIJ stock with a beta of 1.76, 40% ABC stock with a beta of 0.98, and 30% LFM stock with a beta of 2.09. What is the weighted beta for Juan's portfolio? A) 0.516 B) 1.610 C) 1.547 D) 3.605

Juliet owns a PRT Inc. bond with a par value of $1,000. PRT is a AA rated bond maturing in seven years. Juliet receives $55 of interest income from PRT semiannually. Comparable debt, i.e., AA rated, seven-year maturity, yields 12%. The bond's duration is five years. Assume the Fed is concerned about inflation and increases the discount rate. As a consequence, market interest rates on seven-year AA rated bonds change from 12% to 13%. How will the price of Juliet's bond change? A) The price will increase by approximately 7%. B) The price will increase by approximately 5%. C) The price will decrease by approximately 5%. D) The price will decrease by approximately 7%.

Keegan is an analyst for Global Growth and Income Mutual Fund. For the past five years, the fund has returned -20%, 17%, 5%, 15%, and -7%, respectively. Calculate the geometric mean of these returns. A) 5.1105% B) 2.0000% C) 1.0221% D) 1.0018%

LAC Corporation stock is currently trading for $180 per share. If the company institutes a 3-for-2 stock split, calculate the company's stock price following the stock split. A) $90 B) $240 C) $120 D) $100

LFM Corporation declared a record date of Wednesday, May 16, for its next quarterly cash dividend. Determine the last day an investor can purchase LFM stock and receive the current dividend. A) Wednesday, May 16 B) Tuesday, May 15 C) Monday, May 14 D) Friday, May 11

LFM Corporation has an estimated free cash flow to equity (FCFE) of $2.50 per share in the current year. Moreover, its FCFE is expected to grow at a constant rate of 2% per year. Assuming an institutional investor has a required rate of return of 6.5%, calculate the intrinsic value of LFM stock. A) $56.67 B) $55.56 C) $133.13 D) $40.76

LJM stock has a current annual dividend of $2.50 per share that is expected to remain constant. Using the perpetuity dividend discount model, what is LJM's market price if an investor's required rate of return is 10%? A) $25.00 B) $12.50 C) $37.50 D) $50.00

LTD Inc., a candy manufacturer, is considering the use of sugar futures contracts because sugar is a major ingredient in the manufacturing process. What type of hedge position should LTD take in the sugar futures market, and why? A) A long hedge; the company should purchase sugar futures contracts because it is hedging against lower sugar prices. B) A short hedge; the company should sell sugar futures contracts because it is hedging against lower sugar prices. C) A long hedge; the company should purchase sugar futures contracts because it is hedging against higher sugar prices. D) A short hedge; the company should sell sugar futures contracts because it is hedging against higher sugar prices.

Larry is looking to add a real estate investment to his portfolio that is publicly traded on the exchanges, thereby offering him diversification and marketability. He has decided that a real estate investment trust (REIT) is the best choice and asks his financial planner for information about the REITs available for purchase. Based on Larry's request, the financial planner explained the various investment choices. Which of these was incorrectly stated by his financial planner? A) For the shareholders, income received is considered passive income. B) Equity REITs acquire real estate for the purpose of renting the space to other companies, thereby generating income. C) Mortgage REITs finance real estate ventures by making loans to develop property or finance construction. D) Hybrid REITs are a combination of equity REITs and mortgage REITs.

Lauren's bond has a current market value of $987.56 and Macaulay duration of 3.2. Assuming the bond's yield to maturity (YTM) changes from 6.5% to 6%, calculate the estimated percent change in the price of the bond and the new expected market price of the bond. A) +1.5%, $1,002.37 B) −3.0%, $957.93 C) +3.0%, $1,017.19 D) −1.5%, $972.75

Leslie purchased a 10-year bond with a coupon rate of 4.75% paid semiannually. The bond has a current market price of $1,035. Calculate the yield to maturity (YTM) for Leslie's bond. A) 4.3118% B) 4.7500% C) 4.4520% D) 4.3154%

Limited partnerships are distinguished by which of the following? I. The general partner controls the business activities of the partnership. II. The limited partners participate in the business venture with limited liability. III. The general partner determines when distributions are made to the limited partners. IV. The limited partners may have difficulty selling their interests. A) II and IV B) I, II, and III C) I, II, III, and IV D) I and III

Long-term bond funds have A) no interest rate risk. B) no reinvestment rate risk. C) more interest rate risk than short-term bonds. D) minimal purchasing power risk.

Louis owns an investment that is an unmanaged portfolio in which the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the investment portfolio terminates. This statement best describes which type of investment? A) Open-end investment company B) Unit investment trust C) Closed-end investment company D) Hedge fund

Marcy may add 100 shares of LKM corporation stock to her investment portfolio. The stock recently paid a dividend of $1.85 per share. The dividend is expected to grow at a constant rate of 2.25% per year. Her required rate of return is 7%. The stock is currently trading for $35.75 per share. Determine whether she should purchase the stock and why. A) Yes, the stock is undervalued based on an intrinsic value of $33.46. B) Yes, the stock is undervalued based on an intrinsic value of $39.82. C) No, the stock is overvalued based on an intrinsic value of $32.87. D) No, the stock is overvalued based on an intrinsic value of $38.95.

Marvin is considering adding XYZ stock to his holdings. The stock has these characteristics: Beta: 1.45 Standard deviation: 15.58% Current dividend: $1.35 Required rate of return: 8% Risk-free rate of return: 2% The current dividend is expected to grow for three years at a rate of 2% and then 3% thereafter. Based on the information provided, calculate the intrinsic value of XYZ stock and determine if Marvin should add XYZ to his portfolio if it is currently trading at $24.50. A) With an intrinsic value of $29.60, the stock is undervalued and should be added to the portfolio. B) With an intrinsic value of $27.13, the stock is undervalued and should be added to the portfolio. C) With an intrinsic value of $21.60, the stock is overvalued and should not be added to the portfolio. D) With an intrinsic value of $22.90, the stock is overvalued and should not be added to the portfolio.

Mary is traveling to Europe and has $1,000 (U.S.) that she wants to convert to euros. The current exchange rate is 0.90 euros = $1 (U.S.). How many euros will she receive in this exchange? A) 900 B) 1,111 C) 2,000 D) 1,800

Mary owns a portfolio consisting of two stocks, FUR and STC. FUR stock has a beta of 0.90, a standard deviation of 5%, and an actual return of 10%. STC stock has a beta of 1.10, a standard deviation of 7%, and an actual return of 12%. Assume a risk-free rate of return of 3%. Using the Treynor ratio, evaluate which stock had the better risk-adjusted performance. A) FUR stock B) STC stock C) Cannot be determined with the information provided D) Both stocks exhibit the same performance

Mary owns a put option with an exercise price of $20 per share. The option is currently trading for $0.53 and the underlying stock is currently trading for $19.67 per share in the secondary market. Based on this information, select the INCORRECT statement. A) The option has a time value of $0.20. B) The option has an intrinsic value of $0.33. C) The option is out-of-the-money. D) The put option allows Mary to sell the underlying stock for a specified price within a specified period.

Michael owns a municipal bond, trading at par, with a 4.25% coupon rate and is in the 32% federal marginal income tax bracket. Calculate the taxable equivalent yield (TEY) for this bond. A) 2.85% B) 6.25% C) 12.88% D) 5.65%

Mike expects a certain stock to significantly rise in value in the near future. He is expecting a bond to mature in two months and does not want to miss out on any appreciation on the stock while waiting for the funds to become available. Which of these option strategies should be recommended to Mike? A) Buy a call option B) Sell a call option C) Sell a put option D) Buy a put option

Mike places a market order to sell short 200 shares of ABC stock. The order is filled at $23.45 per share. Assuming he can cover the short by purchasing the shares at $20 per share, calculate his gain or loss. A) Loss of $690 B) Gain of $690 C) Loss of $345 D) Gain of $850

Mike, a stock analyst, has determined several factors affecting the expected return on a stock. In addition, he has estimated their sensitivity coefficients and associated risk premiums. Factor Sensitivity - Coefficient Risk Premium Unemployment: 0.7 - 6% Inflation: 0.8 - 4% Demand: 1.2 - 5 Assuming the current risk-free rate of return is 3%, calculate the expected return of the stock using the arbitrage pricing theory (APT). A) 13.40% B) 16.40% C) 12.20% D) 18.00%

Mimi, a client of Osborne Capital, Inc., believes her portfolio should be adjusted. She supports her claim by stating that she just won the lottery and wants to retire 10 years earlier than originally planned. Does she have a valid claim? A) Yes, her wealth and time horizon have changed. B) No, too much information is given to determine. C) Yes, her time horizon has changed. D) No, not enough information is given to determine.

Most fixed-income securities are subject to which of the following risks? I. Purchasing power risk II. Liquidity risk III. Default risk IV. Reinvestment rate risk A) I and II B) II, III, and IV C) I, II, III, and IV D) I, III, and IV

Mutual fund I has a standard deviation of 4% and an expected return of 10%. Mutual fund J has a standard deviation of 8% and an expected return of 13%. If I and J have a correlation coefficient of -1.0, which of the following statements is CORRECT? A) There is no combination of I and J such that the portfolio's standard deviation is zero. B) I and J are perfectly negatively correlated. C) J is less risky than I on a risk-adjusted basis. D) A portfolio combining funds I and J may have an expected return less than 10%.

Mutual fund QUE has a correlation coefficient with the market of 0.82, a beta of 1.05, and a standard deviation of 4%. The risk-free rate of return is 3.5%, and the return on the market is 12%. Mutual fund POI has a Sharpe ratio of 2.05, a Treynor ratio of 0.11, and an alpha of 0.70%. Decide which of the following a rational investor would select if the market's standard deviation is 2% and QUE realized a 13% return. A) QUE over POI because QUE's coefficient of variation is 0.31. B) POI over QUE because QUE's Treynor ratio is 0.09. C) QUE over POI because QUE's Sharpe ratio is 2.38. D) POI over QUE because QUE's alpha is 0.58%.

Mysterious Company stock has a mean return of 9% and a standard deviation of 3%. Based on this information, which of the following statements is CORRECT? A) Five percent of Mysterious Company's returns will be greater than 15%. B) Mysterious Company is unlikely to experience a negative return. C) Half of Mysterious Company's returns will fall below 6%. D) Approximately 68% of Mysterious Company's returns will fall between 3% and 15%.

Nancy bought 50 shares of ABC stock for $50 per share. She made additional purchases at the end of each of the following years: Year 1: 10 shares at $52 per share Year 2: 10 shares at $53 per share Year 3: 10 shares at $45 per share ABC stock has not paid any dividends during her holding period. At the end of Year 4, the stock is trading for $55 per share. Which of the following is Nancy's return over the past four years on ABC stock (assume she sells the stock for the current trading price)? A) 3.25% B) 2.95% C) 4.65% D) 5.00%

Nellie has accumulated $500,000 in a money market deposit account at ABC Bank and Trust. She is worried about the number of bank failures in the recent years and transfers $250,000 into a money market mutual fund paying a slightly higher return offered by her friend's investment firm. Determine the amount she has insured by the Federal Deposit Insurance Corporation (FDIC). A) $500,000 B) $0 C) $250,000 D) $200,000

Norma owns ABC Corporation bonds of AA rated quality that mature in seven years, pay semiannual interest, and have a coupon of 8%. Similar bonds (AA rated, seven years to maturity) yield 9%. The ABC Corporation bonds are convertible into common stock at $26 per share, and the current market price of ABC common stock is $23. What is the conversion value of an ABC Corporation bond? A) $884.61 B) $923.08 C) $851.85 D) $766.47

On December 18, 20X1, John sells some stock for a loss at $15 a share that he originally purchased for $40 per share. On January 9, 20X2, John repurchases the shares for $22 per share. What is his cost basis on the repurchased shares? A) $22 B) $40 C) $47 D) $15

On December 27, 20X0, Jackie sells ABC stock for a loss at $12 a share that she originally purchased for $28 per share. On January 9, 20X1, she repurchases the shares for $15 per share. What is her cost basis on the repurchased shares? A) $16 B) $40 C) $27 D) $31

On January 1, 20XX, one U.S. dollar could buy 105 Japanese yen; on December 31, 20XX, one U.S. dollar could buy 121 Japanese yen. Which one of these statements best illustrates what has happened to the U.S. dollar during year 20XX? A) The U.S. dollar was devalued. B) The U.S. dollar was hedged. C) The U.S. dollar was revalued. D) The U.S. dollar was above parity.

One advantage of convertible bonds is that they A) are usually offered only by firms with high bond credit ratings. B) have higher coupon rates than straight coupon bonds. C) have a higher coupon rate than the underlying stock's dividend. D) offer the ability to buy the underlying stock at a discount.

One implication of the efficient market hypothesis is that A) using public information can provide superior investment results. B) although security markets are efficient, they are not necessarily equally efficient. C) technical analysis, when combined with fundamental analysis, can lead to higher investment returns. D) nonfinancial markets are efficient.

Open interest is A) a technical indicator, used only with financial futures, that indicates the dollar amount of bonds expected to be delivered at contract expiration. B) the rate of interest charged on the difference between the market value of a commodity contract and the amount of margin on deposit in a customer's account. C) the number of futures contracts outstanding for a commodity on any given trading day. D) the number of unexecuted buy and sell orders for a particular commodity pending at the end of trading each day on a commodity exchange.

Ophelia is considering the purchase of the Quest Mutual Fund, which has a beta of 1.2, a standard deviation of 15, and a return of 11%. The current risk-free rate is 4%, and the market risk premium is 7%. Should Ophelia purchase the fund? A) Yes, because of the fund's Treynor ratio. B) No, because of the fund's Sharpe ratio. C) Yes, because the fund has an 11% return. D) No, because the fund has a negative alpha.

Phil is considering adding a tax-free municipal bond to his extensive investment portfolio. He is in the 37% federal marginal income tax bracket and lives in a state that does not impose a state income tax. His broker has offered him the opportunity to purchase a AAA-rated general obligation bond. Assuming the bond has a coupon rate of 3.35%, what is its taxable equivalent yield? A) 5.32% B) 5.15% C) 4.52% D) 3.35%

Portfolio A has a standard deviation of 55%, and the market has a standard deviation of 40%. The correlation coefficient between Portfolio A and the market is 0.50. Calculate the percentage of total risk that is unsystematic. A) 25% B) 75% C) 100% D) 50%

Portfolio immunization is designed to mitigate which type of risk? A) Exchange rate risk B) Investment manager risk C) Default risk D) Interest rate risk

Portfolio immunization is designed to protect bondholders from which of the following risks? I. Interest rate risk II. Reinvestment rate risk III. Default risk A) I, II, and III B) II and III C) I and III D) I and II

RNO Mutual Fund invests in domestic debt and equity securities. The fund's current bond holdings are valued at $63 million, and its equity holdings are valued at $85 million. RNO currently has 3 million outstanding shares; although it is not limited in the number of shares it may sell. Which of these statements is CORRECT? A) RNO is a money market mutual fund. B) RNO shares are priced at $49.33 per share. C) RNO shares are traded on the major exchanges. D) RNO is a closed-end investment company.

Rhett recently purchased a bond with attached warrants that afford him the opportunity to participate in the appreciation of the underlying stock. Which of the following statements correctly describes warrants? I. Warrants are customized to fit the needs of the issuing corporation. II. Warrants typically have a maturity date of several years. A) Neither I nor II B) Both I and II C) II only D) I only

Richard has become very interested in the stock market and enjoys spending his spare time researching companies in the medical field. He believes studying and analyzing the industry, combined with his advanced exposure to trends and new innovations in medicine, will give him an advantage in achieving superior performance in medical stock investment opportunities. Choose the form of the efficient market hypothesis (EMH), if any, that Richard is considered subscribing to. A) Semistrong form B) Strong form C) Weak form D) None of these

Robyn's bond has a current market value of $1,456.78 and a Macaulay duration of 12.5. Assuming the bond's yield to maturity (YTM) changes from 5.55% to 6.25%, calculate the estimated percent change in the price of the bond and the new expected market price of the bond (based on the percent change). A) +3.48%, $1,507.48 B) −8.29%, $1,336.01 C) +8.29%, $1,577.55 D) −0.70%, $1,446.58

Ronald owns a Hydro Industries 7% convertible bond. The bond is convertible into 30 shares of Hydro Industries, which is currently trading at $43 per share. The investment value of the bond is $980, and the current market price of the bond is $1,433. What is the conversion value of Larry's bond? A) $1,290 B) $1,404 C) $1,358 D) $1,433

Rossalyn is researching GFD stock to determine if she should add it to her extensive equity portfolio. This stock has a beta of 1.40 and a standard deviation of 6.85%. Assuming the market rate of return is 10%, and the current 90-day T-bill rate is 2%, what is the market and stock risk premiums for GFD stock? A) Market = 3.15%; stock = 8.85% B) Market = 11.20%; stock = 8.00% C) Market = 8.00%; stock = 11.20% D) Market = 8.85%; stock = 16.85%

STU Corporation stock has an average rate of return of 24% and a standard deviation of 10%. The risk-free rate of return is 4%. Assuming the historical returns for STU stock are normally distributed, calculate the probability that this stock will have a return in excess of the risk-free rate of return. A) 34.0% B) 97.5% C) 2.5% D) 95.0%

The semistrong form of the efficient market hypothesis states that current market prices reflect I. all available information on the history of prices. II. all publicly available information concerning a company. A) Both I and II B) Neither I nor II C) I only D) II only

Sam holds a considerable amount of both Series EE and Series HH savings bonds. He is nearing retirement and likes the fact that his Series HH bonds pay interest semiannually and would like to exchange most of his Series EE bonds for Series HH bonds to increase his cash flow. Choose which of these statements regarding such an exchange is CORRECT. A) Series EE bonds may no longer be exchanged for Series HH bonds. B) Sam may exchange the bonds but must recognize the Series EE accrued interest at the time of exchange. C) Only Sam's Series EE bonds issued prior to 2004 may be exchanged. D) Sam may exchange the bonds but will be subject to a three-month interest penalty.

Select the CORRECT statement regarding foreign investments. A) Eurobonds are commonly used by U.S. companies to finance imports and exports. B) American depositary receipts (ADRs) pay dividends in U.S. currency. C) Global mutual funds invest exclusively in foreign securities. D) Investing directly in a foreign company's shares is a convenient way for the individual investor to diversify a portfolio.

Select the CORRECT statement regarding investors who only purchase high-beta stocks. A) They prefer stocks with high risk and low positive skewness. B) They prefer stocks with low risk and high positive skewness. C) They prefer stocks with low risk and low positive skewness. D) They prefer stocks with high risk and high positive skewness.

Select the CORRECT statements concerning the analysis of portfolio risk. I. Investors estimate the risk of a portfolio on the basis of the variability of returns. II. Markowitz used risk and expected return as the basis for determining efficient combinations of assets. III. For a given level of risk, investors prefer lower returns to higher returns. IV. Investors base decisions solely on expected return and risk. A) II and III B) I only C) I, II, and IV D) II, III, and IV

Select the INCORRECT statement regarding a company's book value. A) Different inventory accounting methods may yield a different value for company assets, thereby affecting the book value of the corporation. B) Book value is determined by subtracting company liabilities from company assets. C) Book value represents an accurate measure of the fair market value of the company. D) Book value per share may be derived by dividing the stockholder's equity portion by the total number of common shares outstanding.

Select the INCORRECT statement regarding futures contracts. A) To complete a futures contract, the delivery of the commodity is required. B) Futures contracts may be written on financial assets or commodities. C) A short position will increase in value if the underlying commodity or asset declines in value. D) Purchasing a contract for future delivery is considered taking a long position.

Select the incorrect statement regarding foreign bonds. A) Yankee bonds are not subject to exchange rate risk, but they are subject to default risk. B) Foreign bonds may provide an investor with portfolio diversification benefits. C) Eurodollar bonds must be registered with the Securities and Exchange Commission (SEC). D) Yankee bonds are sold in the United States by companies outside of the United States and provide all interest payments in U.S. dollars.

Select the investment that gives the shareholder a short-term opportunity to buy new shares of the new stock issue, thereby maintaining the shareholder's respective overall percentage ownership in the corporation. A) Call options B) Preferred stock C) Warrants D) Rights

Select the term that measures how far the actual outcomes of a probability distribution deviate from the arithmetic mean. A) Variability B) Skewness C) Kurtosis D) Lognormal

Select which of these is NOT a primary risk associated with a coupon-paying bond. A) Default risk B) Debenture risk C) Purchasing power risk D) Interest rate risk

Shannon is evaluating the absolute performance of the Shining Star mutual fund. The return of the fund for the past year was 13%, beta is 1.10, and standard deviation is 23. The market return is 9.5%, and the risk-free rate is 4.5%. Which of the following statements is true? A) The fund's Sharpe ratio is 0.37, meaning this fund should be chosen when compared with another fund with a Sharpe ratio of 0.48. B) The fund's Treynor ratio is 7.73, meaning the fund manager achieved a 7.73% higher return than required for the amount of risk taken. C) The fund's alpha cannot be determined; however, 13% is a good relative return. D) The fund's alpha is +3, meaning that the fund manager achieved a higher return than required for the risk taken.

Shari would like to know the weighted beta coefficient for her portfolio. She owns 100 shares of BDL common stock with a beta of 1.3 and total current market value of $8,000; 400 shares of XTP common stock with a beta of 0.9 and total current market value of $13,000; and 200 shares of SPR common stock with a beta of 0.6 and total current market value of $10,000. What is the overall weighted beta coefficient for Shari's portfolio? A) 1.26 B) 0.99 C) 0.93 D) 0.91

Springfield municipal bonds have 12 years remaining to maturity. The bonds pay interest semiannually at an annual coupon rate of 4.25%. The bonds have a yield to maturity of 5%. Calculate the current market price of these bonds. A) $933.53 B) $961.53 C) $1,039.35 D) $932.93

Stock A has an expected mean return of 15% and a standard deviation of 22%; Stock B has an expected mean return of 11% and a standard deviation of 13%; and Stock C has an expected mean return of 18% and a standard deviation of 24%. You want to recommend one of these stocks to a client who is most interested in owning stocks that are more likely to deliver the expected mean return. Which stock should you recommend to meet this client's requirement? A) None of these B) Stock A C) Stock C D) Stock B

Stock XYZ has an average return of 12%; its returns fall within a range of -2% to +26% approximately 68% of the time. Which one of the following numbers is closest to the standard deviation of returns of Stock XYZ? A) 14% B) 28% C) 8% D) 19%

Strahan Corporation's current annual common stock dividend is $3 and is expected to grow by 15% during the next year. The stock's current market price is $35 per share. If Strahan stock had a $30 market price one year ago, calculate the stock's total return. A) 22.86% B) 14.29% C) 26.67% D) 8.57%

TLP stock sells for $40 a share and pays an annual dividend of $2.75, which is expected to increase 5% annually. An investor has a required rate of return of 13%. Which of the following conclusions about TLP stock can be drawn? I. It is undervalued. II. It has an intrinsic value of $36.09. III. It is overvalued. IV. It has an expected rate of return of 12.2%. A) III and IV B) I and II C) I, II, and IV D) II, III, and IV

Tangible assets might be suitable as an investment in the portfolio of an investor looking for A) short-term investments. B) deflationary hedges. C) long-term capital gains. D) stability of periodic cash flows.

Tate is considering the purchase of a stock that just paid a dividend of $0.30 in the last quarter. That dividend has been steady for all of the past year. The company is expected to grow the dividend at 15% per year for the next three years, after which it is expected to grow at a constant rate of 8%. The required return is 11%. What is the maximum price Tate should pay for this stock? (Select the closest answer.) A) $12.98 B) $51.91 C) $45.14 D) $11.30

Terri has been an active investor for many years, and her present portfolio consists of listed stocks, penny stocks, and options. She earns approximately $175,000 annually, has $35,000 in cash to invest, and is in the 32% marginal income tax bracket. Terri is interested in accumulating wealth for the future and does NOT need current income. Which one of these fixed-income securities best suits Terri's needs at this time? A) A rated, par value, short-term, corporate debenture bond B) A rated, discount, long-term, tax-free, municipal revenue bond C) AAA rated, par value, short-term, U.S. Treasury bond D) AAA rated, premium, intermediate-term, tax-free, municipal general obligation bond

The Allegro Mutual Fund has an alpha of +1.50, a Sharpe ratio of 0.44, and an R2 with the Russell 2000 of 0.45. The Moderato Mutual Fund has an alpha of +0.40, a Sharpe ratio of 0.48, and an R2 with the Russell 2000 of 0.52. Which fund should be chosen and why? A) The Moderato Fund because it has a higher Sharpe ratio. B) The Moderato Fund because it has a lower alpha. C) The Allegro Fund because it has a higher alpha. D) The Allegro Fund because it has a lower Sharpe ratio.

The Galaxy Fund has a standard deviation of 15, and a mean return of 9%. The Universe Fund has a standard deviation of 22, and a mean return of 13%. The Milky Way Fund has a standard deviation of 18, and a mean return of 11%. Which fund should you choose in order to minimize the risk per unit of return? A) Universe Fund B) Galaxy Fund C) Milky Way Fund D) Each fund offers the same risk per unit of return.

The Gemini Fund has a correlation coefficient of 0.80 with the S&P 500 Index. How much of the price movement of the Gemini Fund can be explained by the S&P 500 Index? A) 80% B) 100% C) 75% D) 64%

The Madisons are concerned that ABC stock may substantially decline in price in the near future. Which of the following option strategies would best protect the Madison's position in ABC Stock? (Assume 100 shares currently valued at $130/share are owned and all options will expire within 60 days). A) Sell one call option with an exercise price of $150 for $0.50 per share B) Sell one put option with an exercise price of $120 for $2.95 per share C) Buy one put option with an exercise price of $120 for $3.00 per share D) Buy one call option with an exercise price of $100 for $38.25 per share

The Sharpe ratio A) does not assume the portfolio is well diversified. B) assumes the portfolio is well diversified. C) uses the portfolio tracking error. D) uses the portfolio's beta.

The top 10 shareholders of publicly held Emax, Inc., are selling 10 million shares they personally own through a public offering. The investment banker will offer these shares as part of which of the following offerings? A) A third-market offering B) A green shoes offering C) An initial public offering D) A secondary offering

The anticipation of inflation suggests that the investor should A) sell stocks of gold companies. B) buy bonds. C) avoid real estate investments. D) anticipate higher interest rates.

The basic purposes of the investment policy statement include all of the following except A) setting objectives. B) determining communication procedures. C) establishing investment management procedures. D) determining the specific assets to include.

The conversion value of a convertible bond with a conversion ratio of 25, a conversion price of $40, and a market price of the underlying stock of $32 is A) $200. B) $900. C) $1,000. D) $800.

The coupon rate or nominal yield of a bond is the stated annual interest rate that will be paid each period for the term of the bond. Select the statement that best describes how the coupon rate is stated. A) As a percentage of the annuitized value of the bond B) As a percentage of the discount rate of the bond C) As a percentage of the par value of the bond D) As a percentage of the intrinsic value of the bond

The current risk-free rate of return is 4%, and the market risk premium is 5%. One stock under consideration for investment has a beta of 1.3. Calculate the expected rate of return for both the market portfolio and the individual stock. A) Market = 6.92%; Stock = 11.70% B) Market = 11.70%; Stock = 10.50% C) Market = 9.00%; Stock = 10.50% D) Market = 10.50%; Stock = 9.00%

The dollar has been declining against major world currencies for some time. A portion of your international equity holdings includes a sizable stake in Japanese stocks. As the dollar falls relative to the Japanese yen, which of these conditions would you expect to occur? I. U.S. investors in mutual funds that invest in Japanese securities increase their total returns. II. Companies that export products to Japan find that their products become more expensive to Japanese consumers. III. Japanese automobiles imported to the United States become more expensive to U.S. consumers. IV. The U.S. currency experiences a devaluation with respect to the yen. A) II and IV B) I and III C) I, III, and IV D) I, II, IV

The group of investment bankers that actually purchases the stocks to be resold to the investing public is called A) the syndicate. B) the standby group. C) the underwriting manager. D) the selling group.

The interest rate theory that long-term rates consist of many short-term rates and that long-term rates will be the average of short-term rates is known as A) market segmentation theory. B) rate preference theory. C) unbiased expectations theory. D) preferred habitat theory.

The main purpose of a laddered bond portfolio is to A) achieve the highest possible capital gains when interest rates decline. B) minimize the effect of changes in interest rates. C) increase the duration of a bond portfolio. D) have a higher yield to maturity.

The portfolio manager of XYZ Insurance Co. is considering the use of Treasury bond futures to hedge the portfolio of the company. XYZ has a Treasury bond portfolio worth over $500 million. Into what type of hedge position should XYZ enter, and why? A) A short hedge: The company should sell Treasury bond futures contracts because it is hedging against lower interest rates. B) A long hedge: The company should buy Treasury bond futures contracts because it is hedging against lower interest rates. C) A short hedge: The company should sell Treasury bond futures contracts because it is hedging against higher interest rates. D) A long hedge: The company should buy Treasury bond futures contracts because it is hedging against higher interest rates.

The principal functions of an investment banker are to I. distribute securities to the public. II. provide a secondary market. III. provide financing for an individual. IV. advise the issuer about alternatives in raising capital. A) III and IV B) II and III C) I and II D) I and IV

The use of financial leverage affects all of these except A) monetary policy. B) return on equity. C) earnings per share. D) risk to stockholders.

The weak form of the efficient market hypothesis I. reinforces the value of technical analysis. II. implies that technical analysis is not worthwhile. III. implies that fundamental analysis is not worthwhile. IV. implies that inside traders cannot earn superior risk-adjusted returns. A) II only B) I and IV C) II and III D) I, III, and IV

The yield curve graphically plots A) yield on the y-axis and price on the x-axis. B) price on the y-axis and time on the x-axis. C) yield on the y-axis and time on the x-axis. D) price on the y-axis and yield on the x-axis.

The yield curve theory that states current long-term interest rates contain an implicit prediction of future short-term interest rates is known as A) liquidity preference theory. B) market segmentation theory. C) unbiased expectations theory. D) preferred habitat theory.

The yield to maturity on a zero-coupon bond ($1,000 par value) currently selling at $677 and maturing in four years is approximately A) 15.00% B) 10.00% C) 4.00% D) 37.48%

Tim began purchasing BLT, Inc., mutual fund shares several years ago. He has followed a dollar-cost averaging approach by investing $1,000 each year for five years. The following data depicts Tim's purchases: Year - Investment - Share Price 1 - $1,000 - $120 2 - $1,000 - $100 3 - $1,000 - $118 4 - $1,000 - $97 5 - $1,000 - $130 What is Tim's average cost per share? A) $118.23 B) $106.32 C) $126.10 D) $111.58

To be eligible for preferential dividend tax rates A) the stock must be held for more than 60 days during the 121-day period beginning 60 days AFTER the ex- dividend date. B) the stock must be held for more than 60 days during the 121-day period beginning 60 days BEFORE the ex-dividend date. C) the taxpayer must make an election to waive tax deferral on the dividend. D) the stock must have paid dividends for four consecutive quarters.

To be on a corporation's books as holder-of-record (and thus have a right to the next dividend payment), the investor must purchase stock A) before the payment date. B) on the declaration date. C) on or after the ex-dividend date. D) before the ex-dividend date.

To design a market capitalization weighted index, which of the following approaches should be used? A) Weight the components by the total fair market value of their outstanding shares B) Weight the components by their geometric mean return over the past year C) Weight the components by their intrinsic value D) Weight the components by their per share market prices

To evaluate the performance of a portfolio manager, you should calculate the portfolio's A) holding period return. B) dollar-weighted return. C) time-weighted return. D) portfolio return.

Tom owns a taxable investment that earns 8% interest annually. Tom pays taxes at a marginal rate of 24%. Calculate the after-tax rate of return that Tom will receive on this investment. A) 6.25% B) 2.24% C) 6.08% D) 6.30%

Top-down analysis includes which of these? I. Economic and market factors II. Industry analysis III. Company analysis A) I, II, and III B) I and II C) I and III D) II and III

Two mutual funds have these performance statistics: Fund E Fund F Three-year total return 16.5% 17.2% Standard deviation 18.1 16.4 R-squared 81% 87% Sharpe ratio .58 .68 Alpha 1.1 1.6 Which one of the two funds has the better risk-adjusted performance, and why? A) Fund F, because its R-squared is higher. B) Fund F, because its alpha is higher. C) Fund E, because its Sharpe ratio is lower. D) Fund E, because its coefficient of variation is lower.

Under which of these circumstances will dollar cost averaging result in an average cost per share lower than the average price per share? I. The price of the stock fluctuates over time. II. A fixed number of shares is purchased regularly. III. A fixed dollar amount is invested regularly. IV. A constant dollar plan is maintained. A) I and III B) I, III, and IV C) II and III D) I and II

Unsystematic (unique) risk can be reduced by buying A) stocks in natural resource companies. B) stock in less-interest-rate-sensitive companies. C) international stocks. D) stocks in numerous unrelated companies.

Wayne owns shares in the Big Value mutual fund. Last year, Big Value had a return of 18%, the S&P 500 Index had a return of 21%, and six-month Treasury bills averaged a return of 5%. Big Value's standard deviation was 14, the standard deviation of the S&P 500 index was 12, and Big Value's beta was 0.9. Which of the following is the Treynor ratio for Big Value last year? A) +0.93 B) +1.40 C) -0.21 D) +14.44

Wendy is concerned that her investment's actual return will not equal its expected return. Point out the type of risk that she is concerned about regarding her investment. A) Purchasing power risk B) Tax risk C) Business risk D) Investment risk

Wendy traveled to France and converted U.S. dollars into euros when the exchange rate was USD 1.42 for each euro. When Wendy returned from France, she had some euros left over and converted them back into U.S. dollars. At that time, one dollar was worth .77 euros. Wendy wants to know if she made or lost money on the euros she exchanged back into U.S. dollars. You inform her that A) the dollar has strengthened, and she made money. B) the dollar has strengthened, and she lost money. C) the dollar has weakened, and she lost money. D) the dollar has weakened, and she made money.

What is one disadvantage of investing in convertible bonds? A) There is substantial business and market risk. B) The likelihood of a call increases as the price of the underlying stock decreases. C) The yield to maturity tends to be lower than that of similar nonconvertible bonds. D) The dividend yield on the underlying stock is usually greater than the interest income on the bonds.

What is the coefficient of variation for an investment with a standard deviation of 8.65%, an expected return of 11.5%, and a beta of 1.25? A) 0.9402 B) 1.3290 C) 0.1438 D) 0.7522

What is the covariance between OPC and NIR stocks with a standard deviation of 9.13% and 11%, respectively, and a correlation coefficient of 0.85? A) 28.69 B) 29.05 C) 23.77 D) 85.37

What is the downside risk of a 6% coupon convertible bond currently trading at $1,040 with a maturity of 12 years and a conversion value of $950? The current interest rate on comparable debt is 7.5%. A) $90 B) $50 C) $157 D) $40

What is the duration of a zero-coupon bond yielding 9%, maturing in 10 years, and selling for $422.41? A) 8 years B) 9 years C) 10 years D) 7 years

What is the highest long-term capital gains rate on collectibles? A) 20% B) 25% C) 15% D) 28%

What is the holding period requirement for a stock investor for the dividend to qualify for the preferential tax rates? A) The stock must have paid dividends for two consecutive quarters. B) The stock must be held for more than 30 days during the 61-day period beginning 10 days before the ex-dividend date. C) The stock must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. D) The taxpayer must make an election to reinvest any cash dividends.

What is the intrinsic value of a put option with an exercise price of $45, when the stock is selling for $40? A) $50 B) $4 C) $5 D) $1

What type of index is the Dow Jones Industrial Average (DJIA)? A) Price-weighted B) Capitalization-weighted C) Equal-weighted D) Value-weighted

When a company issues an option to buy its stock at a specified price within a specified time period, it is known as a A) long call option. B) rights offering. C) short put option. D) warrant.

When an analyst divides the P/E ratio by the earnings growth rate, which one of these ratios is being used? A) P/E ratio B) P/B ratio C) PEG ratio D) P/S ratio

When analyzing various investment alternatives, investors would generally choose which of these? A) An investment exhibiting a low positive skewness and a platykurtic distribution B) An investment exhibiting a low positive skewness and a leptokurtic distribution C) An investment exhibiting a high positive skewness and a leptokurtic distribution D) An investment exhibiting a high positive skewness and a platykurtic distribution

When considering the purchase of a limited partnership interest, an investor should be most concerned with A) short-term trading opportunities. B) potential tax shelter. C) economic viability. D) loss pass-through.

When using a security market index to represent a market's performance, the performance of that market over time is best represented by A) the change in the index value. B) the change in the standard deviation of the index. C) the index value. D) the percent change in the index value.

Which of the following accurately describes the certificate of deposit investment strategy known as laddering? A) Redeeming a certificate of deposit and reinvesting in a new certificate when interest rates increase B) Immediately purchasing another certificate as one certificate matures C) Purchasing multiple certificates of deposit (CDs), rather than just one, with equally spaced terms of maturity D) Purchasing certificates in progressively increasing deposit amounts

Which of the following actions is consistent with a belief in the efficient market hypothesis (EMH)? A) Waiting to purchase a stock until its price increases above the 40-day moving average B) Selecting a random set of stocks for a portfolio C) Comparing the intrinsic value of a security with its market value D) Searching for undervalued securities

Which of the following are attributes of an economy that is coming out of recession? A) Cyclical stocks will begin to move up in price. B) Unemployment is increasing. C) Interest rates are falling. D) Personal incomes are in decline.

Which of the following are characteristics of closed-end funds? I. A closed-end fund stands ready to redeem shares from investors. II. Closed-end funds trade like common stocks. III. Closed-end fund shares can be bought on margin or sold short. IV. Closed-end funds will always trade at net asset value. A) I and II B) II, III, and IV C) I and III D) II and III

Which of the following are characteristics of collectibles investments that distinguish them from financial investments? I. The market is relatively inefficient. II. The capital gain is taxed at a maximum rate of 20%. III. There are large spreads between bid and ask prices. IV. There is little liquidity risk. A) II, III, and IV B) I, II, III, and IV C) I and III D) I, II, and III

Which of the following are characteristics of exchange-traded funds (ETFs)? I. They may not be sold short. II. They are generally tax-efficient. III. Large investors known as authorized participants buy or sell shares on an "in-kind" basis. IV. They usually trade at or near their net asset value. A) I, II, and III B) II and IV C) II, III, and IV D) I and III

Which of the following are characteristics of the Sharpe ratio? I. The ratio adjusts the return for variability by using standard deviation as the measure of risk. II. The ratio assumes that the portfolio being evaluated is well diversified. III. Both alpha and beta appear in the formula for the ratio. IV. The ratio indicates by how much the realized return differs from the return expected by the capital asset pricing model. A) II and III B) III and IV C) I only D) I and II

Which of the following are considered bond classifications for multisector bond funds? I. Foreign bonds II. High-dividend-paying common stocks III. Commodities A) I and II B) I only C) II and III D) I, II, and III

Which of the following are implications of the weak form of the efficient market hypothesis (EMH)? I. Stock prices fully reflect all historical price behavior. II. Consistently superior performance is common. III. Fundamental analysis may produce superior investment performance. IV. Fundamental and technical analysis can produce superior investment performance. A) II and IV B) I and IV C) I and III D) I only

Which of the following are reasons an investor might buy a stock index call option instead of an individual stock call option? A) The investor is more confident about the performance of an individual stock than the market as a whole. B) The investor wants to hedge his existing stock portfolio against a market decline. C) It reduces the level of systematic risk. D) It is the best way to be fully diversified against unsystematic risk.

Which of the following best represents a characteristic of balanced mutual funds? A) They combine high- and low-risk stock. B) They combine debt and equity securities. C) They combine income and growth stock. D) They combine domestic and international securities.

Which of the following bond strategies should not be recommended if an investor expects interest rates to increase? A) Sell low-duration bonds and buy longer duration bonds. B) Sell low-coupon bonds and buy bonds with high coupons. C) Sell long-term bonds and buy short-term bonds. D) Sell U.S. Treasury bonds and buy U.S. Treasury bills.

Which of the following characteristics are associated with the market anomaly known as the neglected-firm effect? I. Low price-to-earnings (P/E) ratio stocks outperform high P/E stocks. II. Stocks of foreign companies outperform known domestic stocks. III. Neglected-firm stocks underperform large capitalization stocks. IV. Stocks not frequently followed by analysts outperform widely followed stocks. A) I only B) III and IV C) IV only D) II and III

Which of the following combinations of risks is associated with art and other collectibles? A) Market risk and business risk B) Reinvestment rate risk and purchasing power risk C) Liquidity risk and market risk D) Regulation risk and interest rate risk

Which of the following combinations will result in a bond with the greatest price volatility? A) Low coupon and short maturity B) High coupon and short maturity C) High coupon and long maturity D) Low coupon and long maturity

Which of the following correctly describes a disadvantage of cash and cash equivalents? A) investors choosing to redeem their CDs prior to maturity may be subject to a substantial penalty. B) the rate of return on passbook savings accounts is relatively high when compared to higher risk alternatives such as government bonds. C) investments in money market mutual funds are insured or guaranteed by the U.S. government. D) an investor may quickly convert a money market deposit account to cash to meet short-term needs.

Which of the following correctly describes a lifecycle fund? A) A fund that bases and adjusts its asset allocation on a specific target date at which the investor will retire B) A fund that utilizes sector rotation to adjust the asset allocation based on where the economy is in its "life cycle" C) A fund that bases and adjusts its asset allocation based on the current phase of life of the investor D) A fund that invests in other funds, usually offering three portfolios with different levels of risk, such as conservative, moderate, and growth

Which of the following regarding mutual fund performance is CORRECT? I. Past performance is a reliable predictor of future performance. II. Past performance offers some indication as to the competency of fund managers. A) I only B) Neither I nor II C) II only D) Both I and II

Which of the following correctly explains a disadvantage of investing in money market instruments? A) certificates of deposit (CDs) generally pay a higher rate of interest than long-term corporate bonds and are FDIC insured. B) money market mutual funds pay a low rate of interest. C) money market instruments are not subject to purchasing power (inflation) risk. D) certificates of deposit are not subject to penalties for withdrawals made prior to maturity.

Which of the following correctly identifies the role of a limited partner in a limited partnership? A) the limited partners may not participate in the management of the partnership. B) the limited partner controls the business activities of the partnership. C) the limited partners have unlimited liability. D) the limited partner determines when distributions are made to the limited partners.

Which of the following financial intermediaries would a business look to for startup capital? A) Unit investment trusts B) Credit unions C) Mutual funds D) Investment bankers

Which of the following forms of the efficient market hypothesis suggests that fundamental analysis and insider information may produce above-market returns? A) Strong B) Semistrong C) All of these D) Weak

Which of the following is CORRECT with regard to the purchasers of gold futures contracts? A) They do not have to meet margin requirements. B) They are considered to be unleveraged positions. C) They have less speculative positions. D) They run the risk of government intervention altering the supply and demand for gold.

Which of the following is NOT a characteristic of negotiable CDs? A) They are used as short-term drafts drawn to finance imports and exports. B) They are deposits of $100,000 or more placed with commercial banks at a specified interest rate. C) Negotiable CDs are bought most often by institutional investors rather than by individuals. D) Negotiable CDs are bought and sold in the secondary market at a market-determined price.

Which of the following is NOT an advantage of the buy-and-hold strategy? A) The investor can minimize the transaction costs in the acquisition and trading of securities. B) Investors or managers time their security purchases while staying fully or predominantly invested in the market, thereby maximizing profit potential. C) The strategy ensures that the investor will not be out of the market during an upturn in prices or its most profitable trading days. D) The investor's income tax obligations may be managed more effectively.

Which of the following is NOT likely to be an advantage of a valid investment policy statement? A) Provides for short-term strategy shifts in response to short-term dramatic value declines B) Allows for a continual dynamic process in meeting investor objectives C) Identifies and documents investment objectives and constraints D) Promotes long-term discipline in investment decisions

Which of the following is a characteristic of American depositary receipts (ADRs)? A) Dividends are declared in the foreign currency, so exchange-rate risk is completely eliminated. B) ADRs are denominated and pay dividends in foreign currencies. C) They are not relatively liquid and marketable investments. D) Information regarding the foreign company is often more easily attainable with ADRs because the entity holding the security generally has access to that information.

Which of the following is a disadvantage of investing in convertible bonds? A) The yield is less than that of a nonconvertible bond with similar risk and maturity. B) All of these. C) The holder may be forced into conversion if the bond is callable. D) They are doubly cursed in times of high interest rates and low stock prices.

Which of the following is a general characteristic of hedge funds? A) High marketability B) Little or no use of leverage C) Full transparency and disclosure D) Charge both a management fee and a carried interest fee

Which of the following is a risk associated with corporate bonds? A) Reinvestment rate risk B) All of these C) Default risk D) Interest rate risk

Which of the following is a risk involved in an investment in undeveloped land? A) Access to the investor's land may be restricted by adjacent landowners. B) The land may be adversely rezoned. C) The investor may not be able to obtain permits to build on the land. D) All of these.

Which of the following is a written document that sets forth a client's objectives, sets limitations on the portfolio manager, provides guidance to the portfolio manager, and provides a means for evaluating performance? A) Risk-profile questionnaire B) New account form C) Investment policy statement D) Financial planning disclosure

Which of the following is an example of technical analysis? A) 39-week moving average of a company's stock prices B) Growth rate of the industry of which a company is a part C) Debt as a percentage of total capital D) Interest rate trends

Which of the following is both liquid and marketable? A) U.S. Treasury bills B) Passbook savings accounts C) Antique jewelry D) Blue chip stocks

Which of the following is not a type of money market mutual fund? A) Taxable money market fund B) Tax-exempt money market fund- state C) Tax-exempt money market fund - national D) Federally insured money market mutual fund

Which of the following is the primary difference between the underlying assumptions of technical analysis and those of fundamental analysis? A) Technical analysts argue that the market only weighs irrational factors, and therefore, the psychology of investors will produce a herd effect. B) Technical analysts maintain that stock prices adjust quickly to the dissemination of public information. C) Technical analysts believe the trend in security prices is determined solely by the interaction of economic supply and demand. D) Technical analysts hold that the price of a security is established by the expected investor return and a combination of risk factors.

Which of the following is the risk that disappears in the portfolio construction process? A) Unsystematic risk B) Interest rate risk C) Purchasing power risk D) Systematic risk

Which of the following methods can be used in determining the basis in a mutual fund when the shares were acquired at different times? I. Specific identification II. First in, first out (FIFO) III. Average cost method A) II only B) II and III C) I and III D) I, II, and III

Which of the following should be agreed upon between the client and the investment professional when making recommendations based on an investment policy statement? A) Risk tolerance B) Return requirement C) Permitted and excluded investments D) All of these

Which of the following statements about the importance of risk and return in the investment objective is least accurate? A) The return and risk objectives have to be consistent with reasonable capital market expectations, as well as the client constraints. B) The investor's risk tolerance is likely to determine what level of return will be feasible. C) Expressing investment goals in terms of risk is more appropriate than expressing goals in terms of return. D) The return objective may be stated in dollar amounts even if the risk objective is stated in percentages.

Which of the following statements best describes banker's acceptances? A) Short-term drafts drawn by a private company on a major bank used to finance imports and exports B) Promissory notes traded at a premium from their face value in the secondary market C) Negotiable, short-term, unsecured promissory notes issued by large corporations D) U.S. dollar-denominated deposits at banks outside the United States

Which of the following statements concerning a knowledge of the risk/return relationship is CORRECT? I. Future risk/return relationships are not guaranteed to match past risk/return relationships. II. Chances are that past relative relationships will not continue into the future. III. A reduction in risk also means a reduction in the possible return on the investment. IV. The smaller the dispersion of returns, the greater the risk associated with a particular investment. A) I only B) I and III C) II and III D) II, III, and IV

Which of the following statements concerning preferred stock is correct? A) Preferred stock resembles bonds, in that dividend income continues forever unless the stock issue is called or otherwise retired. B) Preferred stock dividends are not legally binding but must be voted on each period by the corporation's board of directors. C) Preferred stockholders are paid before bondholders in terms of priority of payment of income and in case of corporate liquidation. D) If the issuer of a cumulative preferred stock fails to pay the dividend in any year, the unpaid dividend(s) will not have to be paid in the future.

Which of the following statements concerning technical analysis as an approach to selecting securities is correct? A) Technical analysis may only be applied to the aggregate market, not to individual stocks. B) The emphasis of technical analysis is on internal factors that help to detect supply and demand conditions in the market. C) The rationale for technical analysis is that stock prices immediately adjust to changes in the market. D) Company financial statements are the primary tools of the technical analyst.

Which of the following statements concerning the purpose of an investment policy statement is CORRECT? I. An investment policy statement is a written document that establishes client objectives and sets limitations on the investment manager. II. The investment policy statement can be used as the basis to measure the manager's performance against the stated objectives and constraints. III. Possible investment strategies that should be pursued by an investment adviser on behalf of the client begin with the formulation of a complete and thorough investment policy statement. IV. An allocation among asset classes and their respective weights is a part of any investment policy statement. A) I, III, and IV B) I, II, III, and IV C) I and III D) II and IV

Which of the following statements correctly distinguishes an investor who practices indexing? I. The investor purchases index mutual funds. II. The investor is practicing an active form of portfolio management. III. The investor is attempting to beat the market (i.e., S&P 500). IV. Indexing and purchasing index funds tends to exhibit low administrative costs and a low turnover of existing assets. A) I and IV B) II, III, and IV C) I, II, and III D) II and III

Which of the following statements correctly explains separately managed accounts and their relation to mutual funds? A) the key difference between mutual funds and separate accounts is that in a separate account, the money manager is purchasing the securities in the portfolio on behalf of the fund, not on behalf of the investor. B) they are similar to mutual funds, in that a money manager develops a model index specializing in a particular aspect of the market. C) in a mutual fund, the investor owns the underlying securities directly, while in a separately managed account, the investor owns shares of the fund. D) separately managed accounts are individual investment accounts offered by financial consultants who provide advisory services and are managed by independent money managers using an asset-based fee structure.

Which of the following statements correctly identify the factor relationships of the Black-Scholes option valuation model? A) as the amount of time until expiration increases, the price of the call option increases. B) the price of a call option will decrease when the risk-free rate increases. C) the lower the volatility of the underlying stock, the greater the price of the call option. D) if the market price of the underlying stock increases, the price of the call option decreases.

Which of the following statements is CORRECT? I. If an investor expects a decline in market interest rates, she should attempt to construct a portfolio of long maturity bonds with low coupon rates. II. If the investor expects an increase in market interest rates, he should attempt to construct a portfolio of short maturity bonds with high coupon rates. A) II only B) Both I and II C) Neither I nor II D) I only

Which of the following statements regarding Eurodollar CDs is CORRECT? I. Eurodollar CDs are obligations of non-U.S. banks. II. Eurodollar CDs are more liquid than domestic CDs. III. Eurodollar CDs offer a slightly higher yield than domestic CDs. IV. Eurodollar CDs are only used to settle transactions in the U.S. A) I only B) II and IV C) I and III D) I, II, and III

Which of the following statements regarding asset allocation is CORRECT? I. Asset allocation is the main determinant of a portfolio's total return. II. The purpose of strategic asset allocation is to determine an appropriate allocation based on the long-term financial goals of the client. A) II only B) I only C) Both I and II D) Neither I nor II

Which of the following statements regarding cash distributions of ordinary and capital gains dividend distributions to mutual fund investors is CORRECT? A) They are fully taxable to the investor B) They decrease the taxable gain or increase the loss on sale of the shares after taxes are paid C) They are added to the tax basis of the shares once taxes on the distributions are paid D) They decrease the cost basis of the shares whether or not taxes are paid

Which of the following statements regarding certificates of deposit (CDs) is CORRECT? I. CDs are deposits made with a bank or savings and loan for a specified period, commonly one month to five years. II. Negotiable CDs are deposits of $100,000 or more placed with commercial banks at a specified interest rate for a term of up to one year. A) Both I and II B) Neither I nor II C) I only D) II only

Which of the following statements regarding common stock is CORRECT? A) Growth stocks are so named because they pay dividends that grow at a constant rate. B) If Jacob sells his XYZ stock to Darlene the day before the record date, Jacob will receive the dividend for that period. C) During recessions, cyclical stocks typically perform better than defensive stocks. D) An investor who owns common stock in street name is issued a certificate of ownership by the corporation

Which of the following statements regarding duration is CORRECT? I. Risk-averse investors should consider bonds with low durations. II. Aggressive investors should consider bonds with low durations when they anticipate that interest rates will rise. A) Neither I nor II B) I only C) II only D) Both I and II

Which of the following statements regarding fundamental and technical analysis is CORRECT? A) Fundamental analysis may result in better returns than the overall market under both the weak and semistrong forms of the efficient market hypothesis. B) Investors looking for excellent companies to invest in may use bottom-up analysis, which is a form of technical analysis. C) In top-down analysis, an investor would start by researching various industries, then choosing stocks within that industry. D) Technical analysis is not considered valid under the efficient market hypothesis because this type of analysis is attempting to predict future prices based on past price movement.

Which of the following statements regarding futures contracts is correct? A) To complete a futures contract, delivery of the asset or commodity must be made. B) A futures contract is an agreement between two parties to make or take delivery of a specified amount of a commodity or financial asset at a future time, place, and unit price. C) Futures contracts do not trade on an exchange. D) Hedging involves purchasing a futures contract in the same position of that which is currently held.

Which of the following statements regarding hedge funds is CORRECT? A) Hedge fund managers, like mutual fund managers, are compensated largely based on assets under management. B) Hedge funds are passively managed in an attempt to provide predictable returns for investors. C) Hedge funds are usually structured as a partnership. D) Hedge funds are typically favored by inexperienced investors to hedge against losses they may experience as they gain investment savvy.

Which of the following statements regarding market efficiency is correct? A) The efficient market hypothesis (EMH) is the proposition that the securities markets are efficient, with the prices of securities reflecting their current economic value. B) The fundamental assumption of the theory is that prices will not rapidly adjust to reflect any new information. C) Investors who accept the EMH usually adopt an active investment strategy. D) Any new information must be expected; therefore, any changes in the stock price resulting from this new information will be anticipated.

Which of the following statements regarding modern portfolio theory is correct? A) A portfolio that lies at the point where the indifference curve is tangent to the efficient frontier is the optimal portfolio. B) A portfolio that lies below the efficient frontier is superior to the one that has the same risk but lies on the efficient frontier. C) A portfolio that lies below the security market line (SML) is undervalued. D) A portfolio that lies below the efficient frontier is unattainable.

Which of the following statements regarding performance measures is CORRECT? A) A negative alpha indicates the investment lost money. B) Jensen's alpha may be used by itself to judge an investment. C) The Sharpe ratio uses beta as its measure of risk. D) The reliability of their betas is important for the Jensen and Sharpe performance measures.

Which of the following statements regarding security market indexes is CORRECT? A) The Russell 2000 Index is a well-known index used to benchmark large capitalization companies. B) Market indexes reflect the average price behavior of a group of stocks at a given point in time. C) The Wilshire 100 Index is used as a measure of the financial stock sector. D) The S&P 500 Index automatically adjusts for stock splits and dividends by focusing on market value instead of price.

Which of the following statements regarding the arbitrage pricing theory (APT) is CORRECT? A) Beta is a pricing factor. B) The risk-free rate of return does not affect the return. C) Inflation is not a pricing factor. D) Multiple factors affect the return of a security.

Which of the following statements regarding the capital market line (CML) is CORRECT? A) Is not useful for diversified portfolios B) Provides a direct relationship between the risk and return for a well-diversified portfolio C) Uses beta as a risk measure D) Describes the required return of individual stocks

Which of the following statements regarding the efficient market hypothesis (EMH) is CORRECT? I. The EMH suggests that active management should be used. II. Under the EMH, all publicly known information is incorporated into security A) Neither I nor II B) Both I and II C) I only D) II only

Which of the following statements regarding the various performance measures are CORRECT? I. A positive alpha indicates that the manager consistently underperformed the market on a risk-adjusted basis. II. Jensen's alpha indicates how much the realized return differs from the expected return, as per the capital asset pricing model (CAPM). III. The Sharpe ratio is not useful for evaluating the performance of nondiversified portfolios. IV. The Treynor ratio does not indicate whether a portfolio manager outperformed or underperformed the market portfolio. A) I and II B) I and III C) II, III, and IV D) II and IV

Which of the following statements regarding wash sales is CORRECT? I. A wash sale occurs if the taxpayer sells or exchanges stock or securities for a loss and, within 30 days before or after the date of the sale or exchange, acquires similar securities. II. The wash sale rules are easily avoided in the case of fixed-income securities by substituting a bond with the same or similar characteristics as long as it is issued by a different company. A) Both I and II B) II only C) Neither I nor II D) I only

Which of the following stock market anomaly descriptions is CORRECT? A) Neglected firm effect: buy stocks followed by few analysts B) Size effect: big-company stocks outperform small-company stocks over time C) January effect: buy stocks in January D) BVMV: buy stocks with high market value relative to book value

Which of the following terms is considered early-stage business funding for the purpose of research and development of an idea? A) Bridge financing B) First-stage financing C) Start-up financing D) Seed financing

Which of the following would be an appropriate index to track an investment in an international developed markets mutual fund? A) IFC Investable B) MSCI EAFE C) IFC Emerging Markets Free Global D) Russell 2000

Which of the following would cause the risk premium an investor expects to earn on a stock to increase when using the capital asset pricing model (CAPM)? A) An increase in standard deviation B) A decrease in covariance C) An increase in the correlation coefficient D) An increase in beta

Which of these are nondiversifiable risks? I. Business risk II. Interest rate risk III. Market risk IV. Purchasing power risk A) I, II, III, and IV B) I and II C) III only D) II, III, and IV

Which of these best describes a futures contract? A) A futures contract is a self-liquidating, flow-through entity that invests exclusively in mortgage-backed securities. B) A futures contract seeks to invest in an industry sector or index that is undervalued, but is expected to rise in value in the future. C) A futures contract is a derivative characterized by low risk and the potential for high return. D) A futures contract is an agreement between two parties to make or take delivery of a specified amount of a commodity or financial asset at a future time, place, and unit price.

Which of these best describes a real estate mortgage conduit (REMIC)? A) Like other open-end companies, a REMIC issues shares that are redeemed directly by the issuer. B) A REMIC is a self-liquidating, flow-through entity that invests exclusively in real estate mortgages or mortgage-backed securities. C) None of these describes a REMIC. D) A REMIC is an agreement between two parties to make or take delivery of a specified amount of a financial asset at a future time, place, and unit price.

Which of these best describes the concept of asset allocation? A) Dividends being automatically invested back into the investment from which they were earned B) The process of purchasing securities over time by investing a predetermined amount at regular intervals C) A written document that sets forth a client's investment objectives and limitations on the investment manager D) The process of apportioning assets available for investment among various investment classes

Which of these describe differences between preferred stock and long-term bonds? I. Preferred stock usually has a shorter maturity than long-term bonds. II. Corporations receive more favorable tax treatment when investing in preferred stock than when investing in long-term bonds. III. Preferred stock dividends are a stronger legal obligation to the firm than interest payments on long-term bonds. IV. The market price of preferred stock tends to fluctuate more than the market price of long-term bonds. A) II and III B) I and III C) I and IV D) II and IV

Which of these describe similarities between preferred stock and long-term bonds? I. Both dividends and interest are tax-deductible expenses for the issuing corporations. II. Both generally pay a fixed periodic payment. III. Both preferred dividends and interest must be paid before common stock cash dividends are paid. A) III only B) I and II C) I and III D) II and III

Which of these factors should an investor consider when investing in mutual funds? I. Fund performance II. Consistency of performance III. Management continuity IV. Fund age A) III and IV B) I, II, III, and IV C) I and II D) I, II, and III

Which of these is NOT a characteristic of negotiable certificates of deposit (CDs)? A) Negotiable CDs are bought and sold in the secondary market at a market-determined price. B) They are used as short-term drafts drawn to finance imports and exports. C) They are deposits of $100,000 or more placed with commercial banks at a specified interest rate. D) Negotiable CDs are bought most often by institutional investors rather than by individuals.

Which of these is NOT a type of unsystematic risk? A) Country risk B) Financial risk C) Default risk D) Exchange rate risk

Which of these is NOT correct when defining an accredited investor under Rule 501 of Regulation D? A) A natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase, including the equity in a primary residence. B) A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year C) A charitable organization, corporation, or partnership with assets exceeding $5 million D) A director, executive officer, or general partner of the company selling the securities

Which of these is a correct justification for use of an investment in a client's portfolio? I. Blue chip common stocks because they provide a hedge against inflation II. FNMA (Federal National Mortgage Association) securities because they are backed by the full faith and credit of the U.S. government III. Aggressive growth stocks because they perform better during economic contractions A) II and III B) I only C) I and II D) I and III

Which of these represents the best reason to include real estate as part of an investment portfolio? A) Low correlation between real estate and equity investments B) Low potential for capital appreciation C) High liquidity D) Low management costs

Which of these statements are CORRECT of mutual fund dividend distributions? I. The fund pays dividends from net investment income. II. A single taxpayer may exclude $100 worth of dividend income from taxes annually. III. An investor is liable for taxes on distributions whether a dividend is a cash distribution or is reinvested in the fund. IV. An investor is not liable for taxes if he or she automatically reinvests distributions. A) I, II and III B) II and IV C) I and II D) I and III

Which of these statements concerning portfolio diversification is CORRECT? I. By increasing the number of securities in a portfolio, the total risk would be expected to fall at a decreasing rate. II. Total risk is reduced as diversification is increased. III. The benefits of diversification are not realized until at least 30 individual securities are included in the portfolio. IV. Diversification reduces the portfolio's expected return because diversification reduces a portfolio's total risk. A) III and IV B) I, II, and III C) IV only D) I and II

Which of these statements concerning the principles of real estate investing is CORRECT? I. Investors in undeveloped land are seeking returns primarily from capital appreciation. II. Effective real estate investing almost always involves a careful but extensive use of leverage. III. Investors in real estate are usually seeking tax benefits for mortgage interest, property taxes, and depreciation. IV. Generally, investors in developed land experience significant taxable income in the early years of ownership. A) I, III, and IV B) IV only C) I, II, and III D) II and III

Which of these statements correctly describes differences between preferred stock and long-term bonds? I. Interest paid by firms is a tax-deductible expense; dividends paid on preferred stock are not tax deductible. II. Bonds usually have a finite maturity; preferred stock is usually perpetual. III. Bonds pay a fixed amount of interest; preferred stock pays a fluctuating dividend based on earnings. IV. Interest on bonds and preferred stock dividends are legal obligations of a firm that must be paid. A) I, II and IV B) I and III C) I and II D) II and III

Which of these statements correctly explains dollar cost averaging as a portfolio management technique? I. This technique involves investing a specific amount into an investment vehicle, regardless of whether the recent trend in the investment has been up or down. II. If prices decline, the fixed investment amount will purchase a greater quantity of the security. III. For the long-term investor, the presumption is that prices will eventually rise, so a lower average price translates into greater profits. IV. If prices rise, the fixed investment amount will purchase a greater amount of the security. A) I, II, and III B) I and II C) II and III D) I, III, and IV

Which of these statements describing the primary market is correct? A) The purpose of the primary market is to facilitate the initial sale of securities to the public. B) A syndicate is a group of investment banks that collectively underwrite an issue. C) One goal of underwriting is to evaluate a firm's financial needs. D) All of these.

Which of these statements regarding a real estate mortgage investment conduit (REMIC) is CORRECT? I. A REMIC is a self-liquidating, flow-through entity that invests exclusively in real estate mortgages or mortgage-backed securities. II. A REMIC terminates when the mortgages that constitute the investment of the REMIC are repaid. A) II only B) Both I and II C) I only D) Neither I nor II

Which of these statements regarding basic option positions is CORRECT? A) If an investor buys a call, the maximum loss is unlimited. B) If an investor buys a put, the maximum gain is unlimited. C) If an investor sells a call, the maximum loss is the amount of the premium received. D) If an investor sells a put, the maximum loss is the exercise price less the amount of premium received.

Which of these statements regarding bond portfolio immunization is CORRECT? I. Immunization allows an investor to ensure that the value of his or her bond portfolio remains the same, regardless of whether interest rates increase or decrease. II. Immunization is accomplished by creating a portfolio whose duration is equal to the investor's investment time horizon. III. Immunization allows investors to earn a current yield that is equal to the yield to maturity. IV. Immunization allows an investor to earn a specific rate of return, regardless of whether interest rates increase or decrease. A) I and II B) I, III, and IV C) III only D) II and IV

Which of these statements regarding investment risk is CORRECT? I. A firm's decision to buy back some of its own stock in the open market by borrowing funds through a new bond issue is an example of reinvestment rate risk. II. Rising inflation represents purchasing power risk. III. A decline in a firm's share price as a result of a 20% decline in the S&P 500 Index represents market risk. IV. A reduction in the value of an international stock mutual fund because of a depreciation of the Euro is an example of exchange rate risk. A) IV only B) I, II, and III C) II, III, and IV D) I and II

Which of these statements regarding unit investment trusts (UITs) are CORRECT? I. A bond UIT has a yield to maturity. II. UIT sponsors must make a secondary market in the UITs they create. III. UITs have management fees lower than mutual funds. IV. A bond UIT does not replace bonds that are called. A) III and IV B) II and III C) I and II D) I and IV

Which of these statements regarding unit investment trusts (UITs) is CORRECT? A) The majority of UIT offerings are listed on the major stock exchanges. B) UITs are actively managed, as portfolio managers typically attempt to match the return of a stated index. C) At the maturity date of the portfolio, the securities are generally liquidated, and the proceeds are distributed to the investors or trust beneficiaries. D) Units in a UIT are priced in the secondary market at a premium or discount to NAV.

Which of these statements regarding warrants is CORRECT? A) Warrants are safer than corporate bonds. B) Warrants are issued with other securities to make the offering more attractive. C) Warrants give the holder a perpetual interest in the issuer's stock. D) The term of a warrant is generally shorter than the term of a right.

Which of these strategies is considered a protective strategy? A) Buying a put option on a stock already owned B) Purchasing a call option on a stock already owned C) Purchasing a hedge fund D) Buying stock index futures

Which of these types of risk is associated with the degree to which a company utilizes debt to finance its operations? A) Business risk B) Default risk C) Financial risk D) Credit risk

Which one of the following statements CORRECTLY matches a technical indicator to the information it provides in signaling a change from a bear to a bull market? A) Odd lot sales exceed purchases. B) A moving average chart indicates that actual prices have dropped through the average. C) Most financial advisers become bullish. D) Barron's Confidence Index indicates that the yield differential between low-quality bonds and high-quality bonds is decreasing.

Which one of these factors has the greatest impact on the standard deviation of a two-asset portfolio? A) The standard deviation of each security in the portfolio B) The weight of each security in the portfolio C) The portfolio's beta D) Covariance

Which one of these is NOT a typical key element that separates hedge funds from mutual funds? A) Illiquid securities are often used in hedge funds B) Leverage is often used in hedge funds C) Derivatives are used extensively by hedge funds D) Many hedge funds are broadly diversified

Which one of these is a general characteristic of hedge funds? A) High marketability B) Full transparency and disclosure C) May sell short a variety of securities beyond the standard stocks and bonds. D) Little or no use of leverage

Which one of these statements is CORRECT regarding exchange-traded funds (ETFs)? A) In-kind exchanges typically are made in blocks of 10,000 shares. B) An ETF that buys all the securities in an index uses representative sampling. C) Because of their unique structure, ETFs cannot offer currency ETFs. D) They also have lower turnover of assets than mutual funds and are, as a result, more tax efficient

Which one of these statements regarding tangible or collectible assets is INCORRECT? A) The principal source of return from an investment in collectible assets comes from capital gains. B) Because precious stones lack uniformity, they are difficult to value consistently. C) Collectibles markets are inefficient. D) Investors in politically stable countries, such as the United States, cannot benefit from owning gold.

Which statement regarding the concepts of modern portfolio theory (MPT) is NOT correct? A) For any given level of risk, investors prefer higher returns to lower returns. B) Markowitz used risk (as measured by beta) and expected return as the basis for determining appropriate assets or portfolios. C) Indifference curves represent the risk-reward trade-off that investors are willing to make. D) An infinite number of portfolios exist on the efficient frontier.

Which type of hedge should a wheat farmer select? A) A long hedge—buy wheat futures contracts as a hedge against an increase in the price of wheat. B) A long hedge—buy wheat futures contracts as a hedge against a decline in the price of wheat. C) A short hedge—sell wheat futures contracts as a hedge against a decline in the price of wheat. D) A short hedge—sell wheat futures contracts as a hedge against an increase in the price of wheat.

XYZ Company issued a series of bonds 20 years ago. The bonds originally sold at par, have a 6.25% coupon rate (paid semiannually), and mature in 30 years. Five years after issue, the prevailing market interest rate for similar type bonds was 5.15%. Based on this information, identify which of the following statements are CORRECT. I. The bond's yield to maturity at issue was 6.25%. II. The bond's price five years after issue was $1,153.68. III. The current yield of the bond five years after issue was 5.42%. IV. The bond was selling at a discount in the secondary market five years after issue. A) III and IV B) II, III, and IV C) I and II D) I, II, and III

XYZ Corporation issued bonds with a 25-year maturity, $1,000 par value, and 5.75% coupon (paid semiannually). Five years after issue, interest rates on similar bonds fell to 4.75%. Calculate the price that XYZ bonds should sell for in the marketplace. A) $1,189.84 B) $1,000.00 C) $1,128.20 D) $882.05

XYZ Corporation issues a 20-year callable bond paying a 6% coupon (semiannual payments) selling at par ($1,000). XYZ Corporation has the option to call the bonds in five years for 105% of par value. Calculate the bond's nominal yield. A) 4.86% B) 6.00% C) 5.00% D) 6.86%

Xavier is concerned that his investment portfolio is too concentrated in only a few stocks. He meets with his financial advisor for advice. The advisor recommends that Xavier diversify his portfolio among many different types of issues. Which of the following is the primary goal of this strategy? A) Increase liquidity B) Decrease marketability C) Increase portfolio return D) Reduce portfolio risk

Yadira owns 20 stocks across several sectors of the economy that are part of the S&P 500 index, typically known as "blue chip" stocks. Her investments are exposed to which of the following risks? A) Business risk B) Market risk C) Financial risk D) Liquidity risk

Yield curves are constructed from daily information published on U.S. Treasury bond A) yields-to-maturity. B) coupon payments. C) current yields. D) yields-to-call.

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) by what percentage a fund's capital appreciation exceeded the capital appreciation of the average fund in its asset class. B) each fund's performance relative to the S&P 500. C) the difference between a fund's realized return and its risk-adjusted expected return. D) a fund's percentage return above the risk-free rate of return.

You are about to recommend international mutual funds to your clients. Which of the following are characteristics of investing internationally? I. International markets are less efficient than U.S. markets. II. International mutual funds have the exchange rate risks of individual foreign stocks. III. Due to lower correlations with U.S. stocks, foreign stocks can lower total portfolio risk. IV. Investors in foreign securities avoid U.S. tax on realized capital gains. A) II, III, and IV B) I and III C) I and II D) I, II, and III

You are about to recommend the purchase of an additional mutual fund to add to a client's portfolio, with the objective of reducing the portfolio's total risk. Upon analysis of several funds, you determine that the standard deviations of the current portfolio and each of the potential new funds are equal, but that the correlation coefficients of these funds with the current portfolio are as shown in the answer choices below. Which of the funds should you recommend? A) Fund C: correlation coefficient = 0.00 B) Fund A: correlation coefficient = +0.91 C) Fund B: correlation coefficient = +0.65 D) Fund D: correlation coefficient = -0.08

You are choosing between two investments: Mutual Fund A with a return of 12% and a standard deviation of 18%, and Mutual Fund B with a return of 8% with a standard deviation of 12%. If the risk-free rate is 3%, which fund should you choose based upon one of the risk-adjusted return measurements? A) Fund A B) Fund B C) Either Fund A or Fund B D) Not enough information is provided

You are comparing two stocks based on the statistics below. Which one is the better investment based on the risk/return relationship? Stock A & Stock B Average Return: 3.00% & 9.00% Standard Deviation: 3.95 & 11.86 A) Cannot be determined from the information given B) Stock A because it has a lower standard deviation C) Stock B because it has a higher return D) The two stocks have equal risk/reward profiles

You are considering buying a stock that has a mean return of 14% and a standard deviation of 20. You can expect the return to fall within what range 95% of the time? A) -0.06 to 0.34 B) Cannot be determined from the information given C) -0.26 to 0.54 D) -0.46 to 0.74

You currently own 100 shares of a stock that has increased in value from $15 to $35 per share. You do not want to sell the stock but want to protect yourself against a large downturn in the market. Which of the following is an effective action on your part? A) Buy a $30 put option on the stock. B) Sell a $30 put option on the stock. C) Sell a $30 call option on the stock. D) Buy a $30 call option on the stock.

You have narrowed your choice down to these three mutual funds, which have these annual returns. Which fund should you choose based upon risk and return? Fund X Fund Y Fund Z Year 1: +15%, +7%, +12% Year 2: +9%, +13%, +2% Year 3: +5%, +8%, +11% A) Fund X B) Fund Y C) Any of these funds because the risk and return are equal D) Fund Z

You own a small-cap fund and are trying to compare its performance to an appropriate benchmark. Which of the following benchmarks would be the best to use? A) CS First Boston High Yield B) Treasury bills C) The S&P 500 Index D) Russell 2000

You want to generate additional income from your portfolio, and are considering purchasing either bonds or preferred stocks. Which of the following statements is NOT correct concerning the characteristics of bonds and preferred stocks? A) Corporations pay taxes on preferred stock dividends prior to distribution to preferred shareholders, whereas interest on bonds is a deductible expense. B) Bonds are subject to more interest rate risk than preferred stocks. C) In the event of a company's bankruptcy, bondholders would be paid first ahead of preferred stock shareholders. D) Bonds pay interest while preferred stocks pay dividends.

Your client has established a balanced portfolio with various amounts allocated to different asset classes, and periodically she rebalances the portfolio to keep the same approximate percentages in these asset classes. Her approach is A) strategic asset allocation. B) dynamic asset allocation. C) core-satellite asset allocation. D) tactical asset allocation.

Your client has just opened a margin account with your brokerage firm and purchased 500 shares of stock for $60 per share. The firm has a 55% initial margin and 35% maintenance margin policy. Calculate the stock price at which your client will receive a margin call. A) $41.54 B) $31.43 C) $50.76 D) $27.00

Your client is concerned that the stock market is overvalued and may experience a large market correction within the next year. The client is 45 years old, has significant retirement savings, little debt, and no dependents. The current retirement portfolio mix is 80% stock/20% fixed-income. What is the best course of action for your client to take regarding this concern? A) Maintain a long-term perspective and consider keeping the current portfolio allocation. B) Reallocate the retirement plan proceeds into a conservative target asset allocation portfolio focused on U.S. Treasuries. C) Reposition all stock investments into fixed-income investments. D) Liquidate the retirement portfolio and reposition the proceeds into cash.

Your client owns a small-cap fund and wants to compare its performance to an appropriate benchmark. You would advise him to choose which benchmark? A) MSCI EAFE B) Russell 2000 C) Russell 3000 D) S&P 500

Your client, Jackson, is considering adding XYZ Mutual Fund to his portfolio. The fund has a correlation coefficient of 0.55 with the S&P 500, and he wants to know how much systematic risk the fund has when compared to this benchmark. You would advise him that the percentage of systematic risk is A) 70% B) 30% C) 45% D) 55%

Your client, Ralph, has $15,000 of capital gains and $20,000 of capital losses in the current tax year. How much unused loss may Ralph carry forward to the following tax year? A) $3,000 B) $12,000 C) $0 D) $2,000

Your clients have invested in a variety of mutual funds, including foreign country funds. You expect the U.S. dollar to strengthen against the Japanese yen over the next year. Which of these actions would be most appropriate? A) Hedge by taking a long position in yen futures. B) Hedge by taking a short position in yen futures. C) Purchase additional Japanese mutual funds. D) Sell the Japanese mutual funds.

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