Series 65 Unit 19
Which of the following statements regarding investment risk is not correct? A) Systematic risk may be reduced or eliminated by effective portfolio diversification. B) Investors expect to earn a higher rate of return for assuming a higher level of risk. C) The beta coefficient measures an individual stock's relative volatility to the market. D) A stock's level of risk is a combination of market risk and diversifiable risk.
A) Systematic risk may be reduced or eliminated by effective portfolio diversification.
If interest rates are dropping, an investor with a maturing bond will be most concerned with A) the difficulty in finding another investment with a like yield B) a positive yield curve C) a negative yield curve D) the quality declining with the yield
A) the difficulty in finding another investment with a like yield When interest rates decline, investors with maturing bonds will have to accept a lower return on their reinvested principal. This is often called reinvestment risk. Although zero-coupon bonds avoid this risk until maturity, once the bond matures, just like any other bond, the matured principal will have to be invested at current market yields.
If your client is primarily concerned about the rising cost of living but wishes to limit his exposure to business risk, which of the following securities is most appropriate? A) Tax-free municipal bond fund B) S&P 500 Index fund C) AAA intermediate-term corporate bond fund D) Small-cap stock fund
B) S&P 500 Index fund
The business school of a local university is conducting a symposium on investment risk. An investment adviser representative (IAR) attending the session dealing with systematic risk would expect to learn about
market risk.
Liquidity risk would be greatest for an investor whose portfolio was primarily composed of
municipal bonds.
A conservative investor decides to invest in high-quality corporate bonds paying 5% instead of investing in lower-quality bonds paying 9%. The additional 4% return the investor could have potentially earned on the lower-quality bonds represents
opportunity cost.
When a corporation files for bankruptcy, heading the priority for payment would be holders of
senior debt
Which of these is not considered to be a systematic risk? A) Exchange rate risk B) Default risk C) Market risk D) Purchasing power risk
B) Default risk
U.S. Treasury bonds are generally subject to all of the following risks except A) purchasing power risk. B) reinvestment risk. C) liquidity risk. D) inflation risk.
C) liquidity risk.
The common stock of the YXZ Pharmaceutical Corporation, listed on the NYSE, is likely to be subject to I. business risk II. credit risk III. liquidity risk IV. regulatory risk
I and IV
A portfolio that is primarily invested in corporate bonds would be subject to I. credit risk II. interest rate risk III. opportunity cost IV. purchasing power risk
I, II, III, and IV
An investor is analyzing the impact of the specific type of risk affecting bonds because the fixed cash payments that they deliver may become less valuable. What risk is this?
Inflation risk
From first to last, in what order would claimants receive payment in the event of bankruptcy?
Secured debt, general creditors, subordinated debentures, preferred stockholders
As interest rates rise, the opportunity cost of holding cash
increases.
An investment adviser is meeting with an elderly client whose portfolio consists largely of fixed-income investments. Over the past several years, she has been losing purchasing power. As a result, it would be important to inform her of
inflation risk
In October 1987, ABC Manufacturing Company showed a strong balance sheet. Nevertheless, its stock lost 15 points in the "crash of 1987." This is an example of
market risk
If a pharmaceutical manufacturer's stock declines because the federal Food and Drug Administration has doubled the period of time required for clinical trials before any new drug may be released for public sale, this is an example of
regulatory risk
Despite management's best efforts, a corporation with stock traded publicly on the New York Stock Exchange has had to declare bankruptcy and is being forced to liquidate its assets. The liquidation priority is determined by
the seniority of the claim.
Which of the following would constitute political risk that might affect a security? A) New tariffs are levied against the company's major product B) New environment regulations C) A strike by the union representing the company's employees D) A bad decision by the company's CEO
A) New tariffs are levied against the company's major product
Which of the following has the greatest liquidity risk? A) Rental apartment building B) Municipal bond unit investment trust (UIT) C) Real estate investment trust (REIT) D) Long-term bond mutual fund
A) Rental apartment building
Traders in stock index options are exposed to A) redemption risk. B) systematic risk. C) call risk. D) credit risk.
B) systematic risk.
If a customer is concerned about interest rate risk, which of the following securities is least appropriate? A) 10-year corporate bonds B) 5-year corporate bonds C) Treasury bills D) 25-year municipal bonds
D) 25-year municipal bonds
The common stock of companies within which industry sector would be most adversely affected by an increase in the general level of interest rates? A) The food industry B) The clothing industry C) The electronics industry D) The utilities industry
D) The utilities industry
Which of the following will be the most likely risk that you will face during the first year after purchasing a corporate AA bond that matures in 15 years?
Interest rate
A general risk component representing the variability of a stock's total return as it directly relates to overall movements in the general economy is known as
systematic risk.
Which of the following portfolios would most likely be exposed to the most inflation risk? A) 34% diversified common stocks; 33% long-term convertible debentures; 33% noncumulative preferred stock B) 50% U.S. Treasury bonds, average maturity 20 years; 30% U.S. Treasury notes, average maturity five years; 20% 90-day Treasury bills C) 75% S&P 500 Index ETF; 25% municipal bond UIT D) 100% employer's company stock
B) 50% U.S. Treasury bonds, average maturity 20 years; 30% U.S. Treasury notes, average maturity five years; 20% 90-day Treasury bills
Calvin has the following securities in his portfolio: ABC common stock, XYZ common stock, PQR mutual fund (domestic small cap), DEZ mutual fund (foreign small cap), 30-year Treasury bond, and 5-year Treasury note. Which of the following risks should not concern Calvin? A) Business risk B) Default risk C) Reinvestment rate risk D) Systematic risk
B) Default risk
Which of the following describes unsystematic risk? A) It is related to market forces and can be diversified away. B) It is specific to an investment and can be diversified away. C) It is related to market forces and cannot be diversified away. D) It is specific to an investment and cannot be diversified away.
B) It is specific to an investment and can be diversified away.
The MNO Manufacturing Company, headquartered in Springfield, has just filed for bankruptcy. Under federal bankruptcy law, holders of which of the following would have highest priority with the bankruptcy trustee? A) Guaranteed bonds B) Mortgage bonds C) First lien, senior preferred stock D) Class A common stock
B) Mortgage bonds
The major risk for highly rated corporate bonds is
interest rate changes
The risk to bondholders that bonds may lose value during periods of increasing inflation is known as
interest rate risk
In 1986, a sweeping change was made to the U.S. Tax Code. This change had a severe effect upon those who had been investing in certain limited partnership tax shelters. This is an example of
legislative risk.