Finance

Which of the following reveals the relationship of a given security's movement relative to that of the market?

Beta

Which of the following is true of geometric return?1. The geometric return is very similar to the concept of Internal Rate of Return (IRR).2. The geometric return will generally be less than or equal to the arithmetic return.

Both 1 and 2

Which of the following statements is/are correct?1. A dollar-weighted return is the IRR based on the investor's actual cash flows.2. The time-weighted return is the IRR based on the security's cash flow

Both 1 and 2

The Performance Fund had returns of 19% over the evaluation period and the benchmark portfolio yielded a return of 17% over the same period. Over the evaluation period, the standard deviation of returns from the Fund was 23% and the standard deviation of returns from the benchmark portfolio was 21%. Assuming a risk-free rate of return of 8%, which one of the following is the calculation of the Sharpe index of performance for the Performance Fund over the evaluation period?

(0.19 - 0.08) ÷ 0.23 = 0.4783

The ideal correlation between stocks for the purpose of portfolio construction is:

-1.0

Which of the following are advantages to being a shareholder in equities: 1.The expected returns for equities are higher than debt securities. Equities have prices listed on major exchanges and are marketable. Equities typically earn their expected return. Equities that do not pay a dividend are tax efficient.

1, 2, and 4.

Given a mean of 13% and a deviation of 9%, what is the range for 99% of all possible results?

3 standard deviation (99%) -14% to 40%.

Your client, Alex, has only two assets in his portfolio: assets A and B. Asset A had a standard deviation of 40%, and Asset B has a standard deviation of 20%. 50% of his portfolio is invested in Asset A, and 50% is invested in Asset B. The correlation for assets A and B is 0.90. What is the standard deviation of Alex's portfolio?

< 30%.

The following investment return will result in what dollar weighted return? An initial outlay of $50,000, with three years of additional outflows of $10,000 each, and inflows as follows: $0 the first year, $20,000 in years 2 and 3, and sale of the property at the end of year 3 for $75,000.

CF0 = <50,000>CF1 = 0 - 10,000 = <10,000>CF2 = 20,000 - 10,000 = 10,000CF3 = 20,000 - 10,000 + 75,000 = 85,000IRR = 18.32%

Michael has an investment with the following annual returns for four years: Year 1: 10% Year 2: -3% Year 3: 5% Year 4: 11%

AM = 5.75%, GM = 5.60%.

Which of the following are true regarding the investment policy statement? Outlines the general rules for the adviser. Lists the client's objectives and constraints. Assists with future investment advisers understanding the past investment positions. Risk is part of the list of objectives.

All 4 are correct

Jennifer Jones wants to accumulate wealth and she has told you, her new financial planner, that she is risk tolerant. What should be your next step?

Determine Jennifer's true risk tolerance by assessing both her willingness and ability to take on risk.

Which of the following best describes the investment characteristics of a high-quality long-term municipal bond?

High inflation risk; low default risk.

An investor purchased a bond for $980, received $75 in interest, and then sold the bond for $950 after holding it for seven months. What is the holding period return?

Holding Period Return = ($950 - $980 + $75) / $980 = 4.6%

Mutual funds that take the approach that are tax efficient, have low expense ratios and attempt to match the performance of a market are:

Index Funds.

Walter has come to you asking about investments that will produce steady income, provide relative safety of principal and give him a tax advantage. What will you recommend that he consider adding to his portfolio?

Municipal bonds.

If the risk/return performance of a stock lies below the Security Market Line, the stock is said to have a:

Negative alpha.

Which of the following types of investment risk cannot be eliminated through diversification?

Purchasing power risk

Which of the following would be considered a systematic risk?

Reinvestment Rate Risk.

All of the following statements regarding investment risk are true EXCEPT:

Reinvestment rate risk is the risk that inflation will cause prices to increase and a dollar today will not be able to purchase the same amount of goods and services as a dollar tomorrow.

Unsystematic risk can be reduced by buying:

Stocks in numerous unrelated industries.

Which of the following types of investment risk cannot be eliminated through diversification?

Systematic risk.

Which of the following best describes interest rate risk?

The inverse relationship between changes in interest rates and the price of a fixed income security.

All of the following are advantages to investing in open-end investment companies EXCEPT:

They trade at a premium or discount to their net asset value.

All of the following are advantages to investing in open-end investment companies except:

They trade at a premium or discount to their net asset value.

Walt Drizzly stock is currently trading at $45 and pays a dividend of $3.50. Analysts project a dividend growth rate of 5%. Your client, Toby Benjamin, requires a rate of 12% to meet his stated goal. Toby wants to know if he should purchase stock in Walt Drizzly.

Yes, the stock is undervalued.

Which of the following statements regarding investment risk is correct? Beta is a measure of systematic, non-diversifiable risk. Rational investors will form portfolios and eliminate systematic risk. Rational investors will form portfolios and eliminate unsystematic risk. Systematic risk is the relevant risk for a well-diversified portfolio. Standard deviation captures all the risk inherent in an individual security.

1, 3, 4 and 5.

Using the CAPM formula, what return should a client expect from a security with a standard deviation of 6% and a beta of 1.5, when the overall market return has been 8%, and the risk-free rare is around 2%?

11%

Based on the CAPM, what return should Jordan expect from a security that last year returned 9% with a standard deviation of 12%, a beta of 1.2, when the overall market return has been 10.2%, and the risk-free rate of return is 3%?

11.6%.

What is the return that a client should expect from a security that last year returned 11.7% with a standard deviation of 14.6%, a beta of 1.2, when the overall market return is expected to be 10.93%, and U.S. Treasury Bills are expected to earn 3.56%?

12.4%.

A new client owns a U.S. Treasury bond that matures in 26 years. She purchased the bond because she was told that Treasury bonds are risk free. Which of the following statements about Treasury security risks should you communicate to your client? 1. Treasury securities do not have interest rate risk because their coupons are fixed at the time of issue. 2. Treasury securities with long maturities have purchasing power risk because their couponreturns are fixed, even if interest rates rise substantially over the holding period. 3. Treasury securities do not have default risk because the federal government has the powers to tax and create money.

2 and 3.

Which of the following is true of holding period return? 1. Holding Period Return is an annual return commonly used to evaluate investment performance.2. Primarily useful when the holding period is one year.

2 only.

Which of the following statements regarding close-end investment companies, if any, is correct? Close-end funds continually create new shares as new monies are obtained. Close-end funds offer price guarantees.

2 only.

Which of the following statements regarding close-end investment companies, if any, is correct? Close-end funds continually create new shares as new monies are obtained. Close-end funds offer price guarantees.

Neither 1 nor 2.