Section 3 11/19

Investors looking to minimize the effects of taxation on their investments would probably receive the least benefit from A) a growth stock. B) an apartment building. C) an S&P 500 Index fund. D) a corporate bond.

D

High-tech Industries (HTI) went public 4 years ago by issuing 100 million shares of common stock at $1 per share. HTI's earnings have soared and the stock is now selling for $13 per share. HTI would be considered A) a small-cap stock. B) a large-cap stock. C) a mid-cap stock. D) a micro-cap stock.

A

The capital asset pricing model (CAPM) is based on several limiting assumptions. Which of the following statements is correct regarding the CAPM? A) The CAPM assumes that the optimal portfolio should be the one with the highest Sharpe ratio of all possible portfolios. B) The CAPM does not assume that the expected excess returns for the market are known. C) The CAPM assumes that investors' expectations regarding risk and return are not identical but normally distributed. D) The CAPM does not assume that investors have access to the same information.

A

When giving advice to a large pension plan invested heavily in large-cap stocks on how to reduce their systematic risk, you would probably recommend that they A) hedge by purchasing broad index puts B) increase their portfolio diversification C) increase the standard deviation of the portfolio D) raise the correlation coefficient of the securities in the portfolio

A

Your customer redeemed 200 of her 500 Kapco common shares without designating which shares were redeemed. Which of the following methods does the IRS use to determine which shares she redeemed? A) FIFO B) LIFO C) Wash sale rules D) Identified shares

A

An analyst observes that the beta of a security is 1.3, the market return is 6%, and the risk-free rate is 1%. The analyst forecasts that the security will return 7% over the next year. Based on these assumptions, the security is A) undervalued, because the forecasted return exceeds the required return. B) overvalued, because the required return exceeds the forecasted return. C) undervalued, because the required return exceeds the forecasted return. D) overvalued, because the forecasted return exceeds the required return.

B

One of your prospective clients is considered a key employee at his place of business. This individual has a net worth of almost $6 million, currently earns in excess of $500,000 per year, and is married with 2 teenage children. He currently has a little over $1 million in his 401(k), more than half of which is invested in his employer's common stock. The company is the beneficiary of a $1.5 million key person life insurance policy on his life. Given these facts, what is your greatest concern as his adviser? A) Inadequate funding for college savings B) Too high a percentage of the retirement plan invested in the company's stock C) Alternative minimum tax D) Inadequate life insurance coverage

D