Series 65: Unit 21 Quiz 1

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If the current risk-free rate is 5%, and the expected return on the market is 10%, what return can be expected from a security that has a beta of 1.5? A. 15% B. 12.5% C. 20% D. 15.5%

12.5%

XYZ stock has a beta of 0.92. The risk-free rate of return is 3% and the market's rate of return is 8%. Using the capital asset pricing model (CAPM), what is the expected rate of return of this stock? A. 6.85% B. 5.06% C. 7.60% D. 10.12%

7.6%

Due to an inheritance, one of your clients now owns a large position in LMN stock. She is concerned that the stock may decline in the upcoming months while she is deciding what to do with the investment. What type of investment strategy could she employ to protect the stock from substantial downside risk? A. Purchase put options on LMN stock B. Write call options on LMN stock C. Purchase call options on LMN stock D. Diversify into an index fund

Purchase put options on LMN stock

Which of the following factors would be considered by an investor who uses fundamental analysis to value a company's stock? 1. The company's financial condition, as revealed by its income statement and balance sheet 2. General economic conditions, such as employment levels and changes in interest rates 3. Charts showing past movements in stock prices and trading volumes

The company's financial condition, as revealed by its income statement and balance sheet and general economic conditions, such as employment levels and changes in interest rates

A portfolio manager who follows the growth style of investing would most likely purchase shares A. based on their market capitalization B. that are currently trading with a lower than average volume C. at the higher end of their price range for the past 52 weeks D. at the lower end of their price range for the past 52 weeks

At the higher end of their price range for the past 52 weeks

Jane and Malka are discussing the possible form of efficient markets. Jane states that, "A weak form price-efficient market is one in which security prices fully reflect past share price and trading volume data." Malka retorts that she is not sure of Jane's thoughts and says, "If markets are weak form efficient, we cannot consistently outperform the market based on technical analysis." A. Jane is correct, but Malka is incorrect. B. Malka is correct, but Jane is incorrect. C. Both are incorrect. D. Both Jane and Malka are correct.

Both Jane and Malka are correct

Which of the following is the simplest portfolio management style for individual stocks? A. Indexing B. Moving averages C. Buy and hold D. Core

Buy and hold

An investor diversifying a corporate bond portfolio does not consider A. quality B. maturity C. issuer D. domicile of the investor

Domicile of the investor

To a technical analyst, the resistance level signifies the price at which a stock's supply would be expected to A. remain constant. B. increase substantially. C. cause the stock price to "break out". D. decrease substantially.

Increase substantially

Which of the following risks most likely would be reduced as a result of the addition of tangible assets to an investor's portfolio? A. Market B. Nonsystematic C. Inflation D. Liquidity

Inflation

Which of the following is an example of dollar cost averaging? A. Rebalancing your portfolio each quarter on the 20th of the month B. Buying 20 shares of the XYZ Fund each month on the 20th of the month C. Maintaining a constant ratio plan D. Investing $100 into the XYZ Fund each month on the 20th of the month

Investing $100 into the XYZ Fund each month on the 20th of the month

Value investors A. attempt to find value through diversification B. seek undervalued stocks through careful chart analysis C. seek to find securities with high Sharpe ratios D. seek securities that are undervalued or selling for less than their intrinsic value

Seek securities that are undervalued or selling for less than their intrinsic value

Which efficient market hypothesis suggests that an investor can achieve above-market returns only by utilizing insider information? A. Strong B. Semi-strong C. Weak D. Super-strong

Semi-strong

Which of the following investment strategies is used to determine an appropriate allocation based on the long-term goals and risk tolerance of the client? A. Tactical asset allocation B. Top-down fundamental analysis C. Efficient market allocation D. Strategic asset allocation

Strategic asset allocation

Some risk is involved in almost all investments. In general, the greater the risk, A. the smaller the potential return B. the greater the potential return C. the more expensive the investment D. the longer the period until a return will be realized

The greater the potential return

A popular funding technique that involves investing the same amount at regular intervals is known as dollar cost averaging. Participating in this funding approach tends to lessen which risk? A. Timing B. Inflation C. Market D. Credit

Timing

A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's A. 200-day moving average B. support level C. previous high D. resistance level

Support level

The capital asset pricing model (CAPM) is an investment theory that serves as a model for A. pricing securities based on their total risk B. pricing securities based on their unsystematic risk C. pricing securities based on their systematic risk D. measuring the correlation between a security and the overall market

Pricing securities based on their systematic risk

When an analyst discusses grouping companies by market capitalization, the 3 most commonly used categories are A. small-cap, mid-cap, large-cap B. small cap, larger-cap, largest-cap C. small cap, mid-cap, jumbo-cap D. micro-cap, mini-cap, large-cap

Small-cap, mid-cap, large-cap

Two of the major factors involved in the capital asset pricing model (CAPM) are 1. interest rates 2. stock risk premium 3. tax rates 4. market risk premium

Stock risk premium and market risk premium

An investor believes that he can study the history of security trades and security markets in order to identify buying opportunities. Furthermore, he prepares and studies charts on the past prices of the securities he is most interested in purchasing for his portfolio. He uses these charts to try to predict the future activity of a particular stock. What type of strategy is this investor using to make his investment decisions? A. Technical analysis B. Tactical asset allocation C. Ratio analysis D. Fundamental analysis

Technical analysis

Which form of the efficient market hypothesis (EMH) suggests that fundamental analysis and insider information may produce above-market returns? A. Strong B. Weak C. Semi-weak D. Semi-strong

Weak

An investor following the buy and hold model of investing would most likely be A. looking to shelter income from taxation. B. buying a stock as a long-term investment to reach a specific goal. C. buying a stock during the recovery cycle and selling at the peak. D. holding a stock until its ex-dividend date and then selling it to capture the dividend.

Buying a stock as a long-term investment to reach a specific goal

An analytical tool used to project the current value of a common stock using projected future dividends is A. the dividend payout ratio B. the future value computation C. the price-to-earnings ratio D. the dividend discount model

The dividend discount model

A computerized mathematical technique that is often used by investment advisers to project future financial outcomes, such as the probability of a client's funds lasting through retirement, is called A. Monte Carlo simulation (MCS). B. efficient market hypothesis (EMH). C. asset allocation modeling (AAM). D. capital asset pricing model (CAPM).

Monte Carlo simulation (MCS)

Jim Cantore is a 45-year-old client with a $1.5 million portfolio that is heavily weighted toward equities. Cantore will continue working for the next 20 years and has a substantial retirement portfolio through his current employer. Cantore's three children are now nearing college age and will all attend premiere universities in the U.S. which each cost $50,000 per year to attend. All college expenses will be paid out of Cantore's portfolio. Cantore should A. rebalance his portfolio towards aggressive small-cap stocks because he needs to increase the return of his portfolio to cover the upcoming college expenses. B. rebalance his portfolio toward high quality, intermediate-term debt instruments to service the expected liquidity needs of his portfolio. C. rebalance his portfolio toward large-cap common stocks and international securities because education costs are highly correlated with the returns to these securities. D. not rebalance his portfolio because his children should all pay their own way through school.

Rebalance his portfolio toward high quality, intermediate-term debt instruments to service the expected liquidity needs of his portfolio

An investor has opened an account with her IAR by making an initial deposit of $500,000. She agreed to have the account diversified among 4 asset classes as follows: 30% investment-grade corporate bonds 40% U.S. equities 20% cash equivalents 10% REITs She requests her portfolio to be rebalanced on a semiannual basis. If, 6 months after the initial deposit, the account values are: Bonds: $120,000 Equities: $210,000 Cash equivalents: $101,000 REITs: $69,000 it would be necessary to A. sell $30,000 of the cash equivalents and use the proceeds to purchase $30,000 of bonds. B. sell $19,000 of the REITs, $11,000 of the equities and use the proceeds to purchase $30,000 of bonds. C. sell $19,000 of the REITs, $1,000 of the cash equivalents, and $10,000 of the equities and use the proceeds to purchase $30,000 of bonds. D. sell $30,000 of the bonds and use the proceeds to buy $10,000 of the equities, $1,000 of the cash equivalents, and $19,000 of the REITs.

Sell $19k of the REITs, $1k of the cash equivalents, and $10k of the equities and use the proceeds to purchase $30k of bonds

Which of the following actions would you most likely expect from a contrarian investor? A. Buy when most other investors are buying B. Buy stocks trading near or below to their book values C. Sell when most other investors are selling D. Sell when most other investors are buying

Sell when the most other investors are buying

If the efficient market hypothesis is true, portfolio managers should do all of the following except A. work more with clients to better quantify their risk preferences. B. spend more time working on security selection. C. minimize transaction costs. D. add some negatively correlated securities to the portfolio.

Spend more time working on security selection

While managing a client's portfolio, an investment adviser representative attempts to take advantage of perceived market inefficiencies. The IAR is not concerned with the client's long-term goals; rather, the interest lies in continuously changing the investment mix in an attempt to take advantage of overall investor sentiment. Based on this information, what type of portfolio management style is the investment adviser representative using to manage the client's money? A. Portfolio ratio analysis B. Tactical asset allocation C. Buy-and-hold D. Strategic asset allocation

Tactical asset allocation

In the technical analysis of the value of securities, which of the following items is not important? A. The amount of a company's past earnings B. A prevailing market trend in response to shifts in supply and demand C. The breadth of market volume D. Resistance and support levels

The amount of a company's past earnings

When reviewing potential securities to select for an investor's portfolio, a technical analyst would be most likely to evaluate A. the price-to-earnings ratio B. the management tenure C. the daily trading volume D. the price-to-book ratio

The daily trading volume

Discounted cash flow is commonly thought of as applying solely to fixed-income securities. However, forms of DCF used for the valuation of common stock also include 1. the price-to-earnings ratio 2. the dividend discount model 3. the discounted book value model 4. the dividend growth model

The dividend discount model and the dividend growth model


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