Investment Quiz 1 Flashcards
(39 cards)
Sam, a securities analyst for a large wire house, analyzes the history of security trades and stock prices looking for patterns and trends. He has been with the company for five years and has consistently been able to beat the S&P 500 Index by one to two percentage points on a yearly basis. Which of the following techniques would he use to identify stocks for his portfolio?
- Calculate the intrinsic value of a stock using one of the stock valuation models.
- Review a stock price’s moving average over a given time frame.
- Review the trend, upward or downward, of the Dow Jones Industrial Average.
- Calculate, review, and compare financial ratios among stocks in a selected sector.
2 and 3
Vince, age 53, recently lost his $95,000 salaried job due to his company downsizing the management team. He communicates to his CFP® professional that he is working with an executive placement agency to prepare a resume and search for another position within his field of expertise. In the meantime, he is concerned that he will not have enough liquidity to pay for his current expenses. Which of the following should the CFP® professional recommend to Vince to provide for his current needs?
A)
Elect a Section 72(t) distribution from his traditional IRA worth $73,500.
B)
Take a loan from his Section 401(k) plan, with a balance of $350,000, and place this money into an interest-bearing money market deposit account.
C)
Sell a portion of his ABC stock that he purchased five years ago for $25,000, which is currently worth $50,000.
D)
Sell his collection of inherited artwork worth $40,000 at auction.
C
Samuel’s bond has a current market value of $1,056.78 and Macaulay duration of 7.9. If the bond’s yield-to-maturity (YTM) changes from 5.5% to 4.0%, what is the expected percent change in the market price of the bond?
A) -14.20% B) 1.50% C) 5.11% D) 11.23%
D
Kevin and Angela are both in their mid 40s. He works as a manager at a home improvement store. She is an elementary school teacher. They have two school age children. Both children have college savings plans funded solely by their paternal grandparents. The couple needs to assess the asset allocation of their current investments. After meeting with the couple, their CFP® professional determines they are moderate to aggressive risk takers with a long-term time horizon. Furthermore, they are willing to accept additional risk to achieve higher rates of return. Based on the information provided, their CFP® professional should recommend which of the following allocations?
A)
Portfolio 1 - 15% S&P 500 Index Fund, 45% Small-Cap Stock Fund, 10% High-Yield Bond Fund, 30% Municipal Bond Fund.
B)
Portfolio 3 - 15% Pacific Rim Growth Fund, 30% Small-Cap Venture Growth Fund, 30% Biotechnology Fund, 25% High-Yield Bond Fund.
C)
Portfolio 4 - 65% S&P 500 Index Fund, 15% Foreign Stock Fund, 10% High-Yield Bond Fund, 10% U.S. Government Securities Fund.
D)
Portfolio 2 - 20% Large-Cap Stock Fund, 30% Corporate Bond Fund, 40% Russell 2000 Index Fund, 10% Emerging Markets Fund.
C
The City of Greensboro issued AA rated bonds with a 15-year maturity, $1,000 par value, and 3.75% coupon (paid semiannually) to fund a new water and sewer infrastructure. Three years after issue, interest rates on similar bonds fell to 3.25%. At what price should these bonds sell for in the marketplace? (Round to the nearest dollar) A) $1,049 B) $1,000 C) $1,128 D) $739
A
Given the following information:
Portfolio A Standard deviation = 12% Beta = 2.05 Actual return = 4.5% Expected return = 7%
Portfolio B Standard deviation = 8.5% Beta = 1.45 Actual return = 8% Expected return = 7.5%
Assume a risk-free rate of return of 1.75% and an R2 of 0.70 with respect to the market. Which of the following statements is CORRECT?
A)
Portfolio B has a higher Sharpe ratio than Portfolio A indicating that Portfolio B outperformed Portfolio A on a risk-adjusted basis.
B)
Portfolio B has a higher Treynor ratio than Portfolio A indicating that Portfolio B outperformed Portfolio A on a risk-adjusted basis.
C)
Portfolio A has a higher Sharpe ratio than Portfolio B indicating that Portfolio A outperformed Portfolio B on a risk-adjusted basis.
D)
Portfolio B has a higher Jensen’s alpha than Portfolio A indicating that Portfolio B outperformed Portfolio A.
A
Due to the fact that R2 is less than 0.75, the Sharpe ratio must be used to compare the risk-adjusted performance of the portfolios.
Amanda buys 75 shares of BR Enterprise stock for $67 per share on margin. The initial margin is 55%, and the maintenance margin is 40%. If she sells the stock for $78 per share, what is her holding period rate of return (rounded to the nearest percent)?
A) 30%. B) 16%. C) 36%. D) 23%.
A
Proceeds $78 Cost ($67) Gain $11 x 75 shares = $825 (basis) 75 × $67 × 55% = $2,763.75 Therefore, $825 ÷ $2,763.75 = 29.85% (rounded to 30%)
Lucy and Rick, ages 52 and 47 respectively, are concerned that they will not have enough money to retire comfortably at Lucy’s age 70. Lucy was recently promoted to district manager of an inventory control company. Along with the promotion, they have an additional $400 per month they would like invest into a new retirement investment portfolio. They consider themselves to be aggressive risk takers with a long-term time horizon. Which of the following portfolios should their CFP® professional recommend for investment?
A)
Portfolio 3 - 60% Russell 2000 Index Fund, 30% U.S. Government Securities Fund, 10% Money Market Fund.
B)
Portfolio 4 - 20% S&P 500 Index Fund, 40% Corporate Bond Fund, 40% Municipal Bond Fund.
C)
Portfolio 1 - 20% Balanced Fund, 60% High-Yield Bond Fund, 10% Emerging Markets Fund, 10% International Stock Fund.
D)
Portfolio 2 - 70% S&P 500 Index Fund, 20% Corporate Bond Fund, 10% International Stock Fund.
D
Simon and Alexandra Baker are interested in U.S. savings bonds. The couple is expecting their first child in three months. Their financial goals are to save for retirement and the education of their child. The Bakers should purchase:
A)
Series EE bonds in their child’s name to receive tax-free earnings for the child’s future education.
B)
Series I bonds for inflation-protected savings for their child’s education.
C)
Series EE or I bonds for tax-free earnings when used for Simon’s graduate school tuition.
D)
Series HH bonds for tax-efficient savings for their child’s education.
B
Series HH bonds cannot be purchased and are no longer available for exchange of Series EE bonds. To receive the tax benefits for qualified higher education, Series EE or I bonds must be purchased by a taxpayer who is at least 24 years old and who uses the proceeds to finance qualified education expenses for himself, his spouse, or a dependent. Series I bonds provide inflation protection because they have a fixed base rate and an inflation adjustment.
Of the four pairs of assets below, which pair provides the highest level of diversification?
A)
Assets 1 & 2: with a correlation coefficient of +0.92.
B)
Assets 5 & 6: with a correlation coefficient of 0.
C)
Assets 3 & 4: with a correlation coefficient of +0.37.
D)
Assets 7 & 8: with a correlation coefficient of −0.78.
D
An investor is considering the following four bonds:
Coupon Current Yield Maturity Duration Bond A 6% 8% 10 years 7.62 years Bond B 10% 10% 12 years 7.54 years Bond C 0% 8% 8 years 8 years Bond D 8% 10% 8 years 6.72 years Which of the following statements are CORRECT?
- Bond A is more volatile than Bond B.
- Bond C is more volatile than Bond B.
- Bond D is less volatile than Bond A.
- Bond D is more volatile than Bond C.
1, 2, and 3
Only statement 4 is incorrect. Bond D is less volatile than Bond C. Duration captures the impact of a bond’s coupon, maturity, and current yield to provide a measure for the interest rate risk of a bond. The longer the duration, the greater the price change due to a change in interest rates. Bond C is the most price sensitive because it has the longest duration.
What is the duration of a bond purchased for $948.50 that matures in 5 years and has a coupon rate of 12.5%? (Assume annual coupon payments.) A) 3.919 years. B) 3.977 years. C) 3.948 years. D) 4.006 years.
B
Steve, age 34, has $50,000 to invest in a fixed-income security. He has invested in bonds in the past and considers himself to be an aggressive investor. Steve is in the 28% tax bracket and is primarily interested in capital appreciation. Income is a secondary consideration. Steve is reviewing the following securities:
- 12-year, B rated, non-callable corporate bond trading at par with a yield of 6%.
- 25-year, AA rated, callable general obligation municipal bond selling at a discount and yielding 5%.
- 10-year, Baa rated, callable corporate bond selling at a premium with a yield of 5.5%.
- Treasury bills with a yield of 4%.
Which one of these fixed-income securities would be the most appropriate choice for Steve?
2
A tax-exempt municipal bond usually has a higher after-tax yield. The 25-year bond is more likely to generate capital gains if market interest rates fall further. Assuming Steve is an aggressive investor, there is no reason he should invest in Treasuries.
Jim Tripp is an investor in the 33% tax bracket. If Jim invests in a 4.75% municipal bond, his taxable equivalent yield (TEY) would be: A) 6.27% B) 7.09%. C) 4.75%. D) 3.23%.
B
Security A has a standard deviation of 23% and the market has a standard deviation of 18%. The correlation coefficient between Security A and the market is 0.80. What percent of the change in Security A's price can be explained by changes in the market? A) 50%. B) 36%. C) 64%. D) 80%.
C
square the correlation!
Carla is meeting with her CFP® professional, John, to evaluate the financial strengths and weaknesses of her current situation. Her CPA has prepared a statement of financial position for Carla’s reference, which she presents to John for analysis. After the meeting, John discovers that the balance of her traditional IRA on her brokerage statement is $150,000, but on her statement of financial position, the balance is listed as $115,000. What should John do next?
A)
John should amend the statement of financial position to reflect the $150,000 balance.
B)
Contact Carla’s CPA to discuss the statement of financial position.
C)
Contact Carla to verify the accuracy of the information on the statement of financial position.
D)
Proceed with developing the financial plan based on the information provided by the client.
C
ABC’s stock is currently trading in the secondary market for $80 per share. John purchases an ‘in-the-money’ call option contract, selling at $11, with an expiry date in two months and an exercise price of $75. If the stock price increases to $88 per share and he exercises the option, which of the following is CORRECT?
- He realized a net profit of $200.
- He paid $1,100 for the call option contract.
- He realized a net loss of $800.
- He paid $7,500 to buy the stock upon exercise.
1, 2, and 4
Harvey, a 70-year old retiree, recently purchased a condominium in Florida to be closer to his grandchildren. He receives a pension of $1,500 per month, and his current investments are estimated to provide an additional $250 per month for the remainder of his life. Recently, Harvey was in a car accident and received $250,000 in compensation for his injuries. He would like to invest the funds in a guaranteed investment that will increase his total monthly income to $2,750. Based on this information, which of the following securities should Harvey purchase?
A)
30-year U.S. Treasury bonds with a 5.15% coupon.
B)
10-year TIPS with a 4% coupon.
C)
30-year STRIPS based on 5% coupon Treasury bonds.
D)
Series EE savings bonds with a current yield of 1.5%.
A
Harvey requires an additional $1,000 per month or $12,000 per year on newly invested dollars. This translates into a minimum rate of return of 4.8% ($12,000 ÷ $250,000). TIPS, STRIPS, savings bonds, and Treasury bonds are all guaranteed by the U.S. government, but only the Treasury bonds provide the necessary income to reach his goal. STRIPS and U.S. savings bonds will not provide him with any current income.
William, a CFP® professional, has prepared a comprehensive financial plan for his clients, Harvey and Elayne. The couple is scheduled to come to his office next week to review the documents. During the next meeting, William should cover all of the following points EXCEPT?
A)
He should review the couple’s goals and objectives.
B)
He should define the scope of the engagement with the clients.
C)
He should provide the couple with his recommendations.
D)
He should present a number of alternatives to his clients.
B
When the market yield is 8%, which of the following equally rated bonds will have the potential for the greatest relative price volatility to changes in interest rates?
A)
A 12% coupon bond with 12 years to maturity.
B)
An 8% coupon bond with 12 years to maturity.
C)
A 12% coupon bond with six years to maturity.
D)
An 8% coupon bond with six years to maturity.
B
Generally, a low coupon bond is more susceptible to price fluctuations than a high coupon bond and a long-term bond is more susceptible to price fluctuations than a short-term bond. The bond with the lowest coupon and highest maturity is subject to the greatest price volatility.
Adam, age 42, considers himself to be an aggressive risk investor. He has a large investment portfolio that he actively manages through fundamental analysis. He is always searching for new and exciting investment ideas to increase the value of his portfolio. Generally, he would prefer which of the following stocks for his investment portfolio?
- ABC stock with lower risk and high positive skewness.
- JEM stock with higher risk and low positive skewness.
- XYZ stock with lower standard deviation and a leptokurtic distribution.
- CPM stock with higher standard deviation and a platykurtic distribution.
1 and 3
Investors generally seek an investment with low risk (low standard deviation). Also, they would tend to prefer stocks with high positive skewness and a leptokurtic distribution. Stocks exhibiting high positive skewness have a larger than average number of positive price movements. Investments exhibiting a leptokurtic distribution have more observations clustered around the mean, resulting in lower variance (standard deviation).
Suppose Mij Saito, a Japanese investor invested 1,000,000 yen in ABC stock in the U.S. when the exchange rate was 125 yen = $1 and ABC was at $50 per share. After six months ABC was selling at $54 per share and Mij liquidates his investment. However, the Yen depreciated by 10% during this period. Which of the following statements is NOT correct?
A)
Mij earned a 20% return on his investment when he converted his sale proceeds into yen.
B)
Mij held 160 shares of ABC.
C)
The dollar was selling for 112.5 yen when Mij sold his shares.
D)
ABC yielded an 8% return to U.S. investors.
C
XYZ mutual fund is researching the possibility of acquiring shares of a manufacturing company in a foreign country. Which of the following risks should the investment company analyze and review before making the investment?
- Political risk.
- Exchange rate risk.
- Marketability risk.
- Default risk.
1, 2, and 3
XYZ mutual fund should be concerned with all of these risks except default risk. The investment company is acquiring shares of the company rather than debt, therefore, the investment is not subject to default risk.
Tom owns a taxable investment that earns 8% interest annually. Tom pays taxes at a marginal rate of 28%. What is the after-tax rate of return that Tom will receive on this investment? A) 2.24% B) 5.76% C) 6.25% D) 6.30%
B
