Unit 3: Session 2: Methods of Quantitative Analysis

As the correlation between any two assets decreases: A)greater risk is assumed. B)the benefits of diversification decrease. C)the benefits of diversification increase. D)the standard deviation of the portfolio increases.

C

If the required rate of return is higher than anticipated in a present value calculation, the effect would be that A)the future value would be higher B)the yield to maturity would increase C)the present value would be lower D)the present value would be higher

C

A bond is maturing in exactly 1 year. With a discount rate of 10%, which of the following purchase prices will result in an NPV of zero? A)$890.00 B)$910.00 C)$900.00 D)$909.09

D - $909.09*1.1 = $1000

A security that your client has been following has a historical average annual return of 11% and a standard deviation of 6%. Knowing this, it would be expected that 95% of the time, your client could expect a return within the range of: A)−66% and +66%. B)+5% and +17%. C)−7% and +30%. D)−1% and +23%.

D - 95% of the time, a stock will range within 2 standard deviations of its historical return. In this case, 2 times 6% means that the range will be down 12% from the historical 11% and up 12% from the historical 11%.

Which of the following methods of calculating investment returns are discounted cash flow (DCF) techniques? - Net present value (NPV). - Holding period return (HPR). - Internal rate of return (IRR).

1 & 3

A portfolio manager with a growth style would probably diversify by: A)placing a portion of the portfolio into high-yield bonds. B)concentrating in stocks in one or two industries. C)devoting a portion of the portfolio to securities with a negative correlation. D)attempting to build a portfolio with a very high correlation.

C

An investment adviser is analyzing 4 bonds of similar quality for a client. Bond A has a coupon of 6%, matures in 12 years, and is currently priced at 50. Bond B has a coupon of 8%, matures in 9 years, and is currently priced at 50. Bond C has a coupon of 4%, matures in 18 years, and is priced at 45. Bond D has a coupon of 12%, matures in 6 years, and is priced at 50. Based on NPV, which of these bonds represents the better value?

C

In general, one would prefer to purchase a bond when its current market price is A)more than its present value B)the same as its present value C)less than its present value D)less than its future value

C

One of the most important risk measurement tools is standard deviation. If one were analyzing some mutual funds, the one with the highest standard deviation would most likely be a: A)specialized fund concentrating in public utility stocks. B)balanced fund. C)small-cap fund. D)large-cap fund.

C

In a rising market, which of the following is least volatile? A)A stock with a beta of 2.0. B)A stock with an alpha of 2.0. C)A stock with a beta of 0.5. D)A stock with an alpha of 0.5.

C - Beta is a measure of a stock's volatility relative to the overall market, as measured by the S&P 500. A stock with a beta of 2.0 will move twice as fast as the overall market, while a stock with a beta of 0.5 will move half as fast as the overall market.

Which of the following attributes of common stock best describes why internal rate of return (IRR) is not generally used to determine the return on common stock? A)Uneven cash flows. B)Common stock does not have a net present value. C)Uneven cash flows and no maturity. D)Uneven cash flows, no maturity date and price.

D

The Smiths are saving money for a down payment on a house. The Smiths have $25,000 in cash and they estimate that in 5 years they will have approximately $31,000 if they deposit their cash in a savings account that compounds interest yearly. To calculate the $31,000 amount, the Smiths determined the: A)net present value of the $25,000. B)future value of the $25,000. C)internal rate of the return on the $25,000. D)present value of $25,000.

B

The difference between present value and net present value represents the A)credit risk premium B)discounted cash flow C)initial cash outlay D)internal rate of return

C - When computing the net present value, we remember that the word net means something must be subtracted. The number subtracted is the initial cost of the investment.

Present value is a computation frequently used to determine the amount of deposit needed now to meet a future need, such as a college education. If an investor uses an expected return of 8%, but the actual return over the period is 6%, A)the present value was insufficient to meet the objective B)the future value will not be able to be computed C)the yield to maturity will be lower than anticipated D)the accumulated value will meet the objectives

A

Which of the following correlations would represent two assets that tend to move in tandem with one another? A)−0.68. B)0.16. C)0.81. D)−0.11.

C - The correlation coefficient ranges from −1.0 to +1.0 and measures the varying relationship of assets (or securities) to one another. A correlation close to +1.0 would indicate that the assets should move in tandem. A correlation close to 0 would indicate that the assets would have little relationship to one another, and a correlation of -1.0 would indicate that the assets should exhibit virtually opposite behavior.