Practice Test I

Question 1

An employer plans to use corporate owned life insurance to informally fund a nonqualified, deferred compensation agreement and wants flexibility regarding investment choices which one of the following types of life insurance should this employer choose

A. Joint life insurance.
B. Variable life insurance.
C. Whole life insurance.
D. Universal life insurance.

Answer 1

B. Variable life insurance.

Question 2

The latest economic reports have been gloomy, and the stock market is in a protracted slump. Most of your regular stock. Customers are selling out their positions. A new client Mr. Jones sees these conditions as a buying opportunity you would define his investment personality as.

A. Contrarian
B. Risk-averse.
C. A follower.
D. Impatient.

Answer 2

A. Contrarian.

Question 3

As of December 31, Bob Larkin has the following financial data
Bond fund $17,000
Residence $400,000
Vested 401(k) plan $95,000
Auto notes $16,000
Residence mortgage $285,000
Auto payment $7000
Automobiles $45,000
Checking account $8000
Utilities $4000
CD $15,000
Stock $125,000
Home equity loan $40,000

What is Bob’s net worth?

A. $403,000.
B. $355,000.
C. $364,000.
D. D $420,000.

Answer 3

C. $364,000.

Assets = $17,000 plus $400,000 plus $95,000 plus $45,000 plus $8000 plus $15,000 plus $125,000 equals $705,000
Liabilities = $16,000 plus $285,000 plus $40,000 equals 341,000
Notice that auto loans of $16,000 are included in this calculation but auto payments of $7000 is a cash flow item and therefore not included
$705,000 -$341,000 =$364,000.00

Question 4

For the year, indeed, December 31, Ted Jones has the following financial information
Salary $70,000
Auto payments $5000
Insurance $3800
Food $8000
Credit card balance $10,000
Dividends $1100
Utilities $3500
Mortgage payments $14,000
Taxes $13,000
Clothing $9000
Interest in income $2100
Checking account $4000
Vacations $8400
Donations $5800

What is the surplus or deficit for Ted?

A. -$500.
B. $6500.
C. $10,700.
D. $2700.

Answer 4

D. $2700.
Income = $70,000 plus $1100 plus $2100 = 73,200
Expenses = $5000 plus $3800 plus $8000 plus $3500 plus $14,000 plus $13,000 plus $9000 plus $8400 plus $5800 = 70,500
73,200 - 70,500 = $2700
Credit card balance and checking account are balance sheet items

Question 5

Which one of these statements comparing the suitability and fiduciary standards is correct

A. Both approaches are primarily solution, driven, and require looking out for the best interest of the client.
B. Professional subject to either standard answer to the same regulators.
C. Disclosure requirements are very similar for both standards
D. Legally suitability disputes are often resolved in arbitration whereas fiduciary disputes are ultimately resolved in the courts.

Answer 5

D. Legally suitability disputes are often result in arbitration, whereas fiduciary disputes are ultimately result in the courts.

Question 6

Which of the following types of distributions from a qualified retirement plan may be subject to mandatory 20% withholding

A. Lump sum payments.
B. Periodic distributions or annuity payments.
C. Direct rollover.
D. Indirect rollover.

Answer 6

D. Indirect rollover.

Question 7

Which one of these statements regarding a qualified plan is correct

A. Distributions from pension plans are taxed at capital gains rates if contributions have been in the plan for more than 12 months.
B. Certain plans are partially exempt from ERISA requirements.
C. The employers deduction is available in the year that a contribution is made.
D. The plan may discriminate in favor of highly compensated employees.

Answer 7

C. The employers deduction is available in the year that a contribution is made.

Question 8

All the following should be agreed-upon between the client and the investment professional when making recommendations based on an investment policy statement except

A. Risk parameters.
B. Specific investments.
C. Time horizons.
D. Asset allocation.

Answer 8

B. Specific investments.

Question 9

Which of the following has a direct bearing on which investments are appropriate for achieving a goal?

A. The investors net worth.
B. The investment risk profile.
C. The investors time horizon.
D. The investor’s cash reserves.

Answer 9

C. The investor’s time horizon.

Question 10

One purpose of an investment policy statement is to

A. Establish a diversified portfolio.
B. Established risk levels acceptable to the client.
C. Provide guidelines around which the portfolio is to be constructed and managed.
D. Include or eliminate certain asset classes in the portfolio.

Answer 10

C. Provide guidelines around which the portfolio is to be constructed and managed

Question 11

Which of the following are elements of an investment policy statement?

I. The client’s investment goal.
II. Suitable and unsuitable investment vehicles.
III. In acceptable risk level.
IV. A provision for periodic review.

A. II, III, and IV
B. I, II, III, and IV
C. I and III
d. I, II, and IV

Answer 11

B. I, II, III, and IV

Question 12

As the investment policy statement, formulation move to policy implementation, the

A. Investment professional, increasingly relies on the client.
B. Investment professional takes a leading role.
C. Client provides more detailed information to the investment professional.
D. Client and investment professional share responsibility equally.

Answer 12

B. Investment professional takes a leading role.

Question 13

An investor notices that technologies stocks are in a strong bull market and wants to take advantage of it, even though valuations are at record high levels. He buys a technology stock that a brokerage firm is recommending which one of the following is the investor demonstrating?

A. Mental accounting.
B. Anchoring.
C. Rationalization.
D. Framing.

Answer 13

C. Rationalization.

Question 14

What change in a client situation that could require an adjustment in the asset management process would be

A. Increasing the expected return of the clients portfolio.
B. Expectations the bull market will continue for a longer period of time than originally anticipated.
C. A sudden increase of the rate of inflation.
D. A sudden early retirement from employment.

Answer 14

D. A sudden early retirement from employment.

Question 15

Dan has bonds maturing in two weeks. Since he bought the bonds, interest rates have fallen. Dan’s bonds are most likely subject to which one of the following risks?

A. Reinvestment risk.
B. Financial risk.
C. Interest rate risk.
D. Default risk.

Answer 15

A. Reinvestment risk.

Question 16

Jim Wilson has $20,000 portfolio four different stocks the distribution of this capital and the beta of these stocks are shown below
Stock - % of port. Value. - Beta
Stock A. 10%. 1.1
Stock B 20%. 1.15
Stock C. 30%. 1.3
Stock D. 40%. 1.25

What is the weighted average beta of Jim stock portfolio?

A. 1.20
B. 1.25.
C. 1.23
D. 1.27.

Answer 16

1.23
(.1x1.1) + (.2x1.15) + (.3x1.3) + (.4x1.25) =1.23

Question 17

The risk free rate is 3%. The market rate of return is 10%. The standard deviation of XYZ stock is 20 and the beta of XYZ stock is 1.4 given this information and using the capital asset pricing model what is the expected return of XYZ stock

A. 12.20%.
B. 13.20%.
C. 12.80%.
D. 9.17%.

Answer 17

C. 12.80%.

3 + (10-3)1.4 =12.8

Question 18

Assume the following asset classes have the correlation to long-term corporate bonds shown below

Treasury bills .01
Gold -.25
Large stocks .31
Small stocks .26

Which one of the following provides the most diversification benefit to a portfolio consisting of long-term corporate bonds

A. Small stocks.
B. Gold
C. Treasury bills.
D. Large stocks.

Answer 18

B. Gold.

As a general rule of the asset that provides the most diversification from long-term corporate bonds is the one furthest from + 1.0 moving toward -1.0 in this case gold provides the most diversification benefit

Question 19

Nancy has $10,000 to invest at the beginning of each of five years had to fixed an annual rate of 8%. How much will her money be worth in five years?

A. $72,346.
B. $63,359
C. $73,112.
D. $84,385.

Answer 19

B. $63,359.

BEG mode.
PMT = 10,000
I/YR = 8
N = 5
Solve for FV = $63,359

Question 20

An investor who would like to know how a portfolio manager performed relative to how the manager was expected to perform our risk adjusted basis would use which one of the following indicators

A. Sharp ratio.
B. Treynor ratio
C. Jensen’s alpha.
D. Beta coefficient.

Answer 20

C. Jensen’s alpha

The indicator that measures performance in relation to what was expected on a risk adjusted basis as Jensen‘s alpha alpha compares the expected rate of return as computed by CAPM to the portfolio’s actual performance, a positive number alpha in a case that the manager performed better than expected on risk adjusted basis

Question 21

Asset allocation could best be defined as the process of

A. Putting all of your eggs in the same basket.
B. Maximizing returns to selection of the best performing asset class.
C. Maximizing returns while simultaneously minimizing risk.
D. Distributing portfolio investments among various investment categories.

Answer 21

D. Distributing portfolio investments among various investment categories.

Question 22

Based on historic performance data and this course, which class of assets has provided the greatest pretax total return since 1926

A. Small cap stocks.
B. Corporate bonds.
C. Large cap stocks.
D. Government bonds.

Answer 22

A. Small cap stocks.

Question 23

Investment professional Ted Conway has just received the latest long-term total return data for different asset classes. He sees that common stocks return 10% compounded with a standard deviation of 14.0 T bills turned in a 4% return with a standard deviation of 3.0 what is the expected return of a portfolio of 80% stocks in 20% tea bills

A. 11.80%.
B. 8.5%.
C. 8.8%.
D. 7.0%.

Answer 23

C. 8.8%.

(.80 x .10) + (.20 x.04) = .088
.08 + .008 =0.088

Question 24

Which one of the following is a characteristic of a mortgage-backed securities?

A. Periodic payments are the same amount until maturity.
B. The interest rate on the outstanding mortgages changes due to refinancing.
C. They make semi annual interest payments.
D. Quoted yield are based upon anticipated pre-payment of the underlying mortgages.

Answer 24

D. Quoted yield are based upon anticipated pre-payment of the underlying mortgages.

Mortgage back security pay monthly payments that may vary, depending on any prepayments of principal. As such yields are quoted based on these anticipated pre-payments

Question 25

According to research reports from your firm, CodeHead Software earnings for this year are estimated to be $2.00 and next year estimated to be $2.25 per share. The current P/E ratio of similar software vendors is 15 but CodeHead typically sales at a 10% premium to these other vendors. What stock price would you estimate for CodeHead next year? A. $33.00 B. $37.13. C. $33.75. D. $30.00

Answer 25

B. $33.75 First determined the PE for a coat head it sells at a 10% premium so the PE of the industry has to be increased by 10% . 10% of 15 = 1.5, which added to 15 = 16.5. Then taking next year‘s earnings of $2.25 x 16.5 equals 37.125 or 37.13.

Question 26

Henry owes a 10 year bond with a coupon rate of 4.85% paid semi annually if the comparable yield for this quality bond is currently 5.5% what should be the intrinsic value of his bond? A. $847.03. B. $930.51. C. $950.51. D. $929.67.

Answer 26

C. $950.51. Calculated as follows (2 p/yr): N = 20 (10 x 2); I/YR = 5.5; PMT =24.25 (4.85 x 1,000 / 2); FV = 1000; solve for PV = 950.51

Question 27

Which of these correctly list characteristics of the downturn period of a business cycle A. Tax cuts, wage cuts, high inventories. B. High interest rates high factory utilization rates increased wage demands. C. Low in inventories, low factor utilization, low interest rates D. Falling interest rates, increased unemployment, lower lending activities

Answer 27

D. Falling interest rates, increased unemployment, lower lending activities

Question 28

Tactical asset allocation is utilized to A. Move assets from those that appear overvalued to those that appear undervalued. B. Optimize the risk return balance on long-term portfolios. C. Utilize index funds for the core positions and the satellite portion is then invested to take advantage of opportunities to add return. D. Create efficient portfolios that provide the best balance risk and return over the long-term.

Answer 28

A. Move assets from those that appear overvalued to those that appear undervalued.

Question 29

The relationship between investment strategy and investment policy is one in which A. Investment strategy is compliant with the investment policy. B. Investment policy is established once the investment strategies to be used or agreed upon. C. Investment policy is determined by investment strategy. D. Investment strategy dictates the asset categories to be incorporated into the investment policy.

Answer 29

A. Investment strategy is compliant with the investment policy.

Question 30

Susan Benson has adopted a averaging strategy of increasing her accounts value by $5000 each month how many shares round to the nearest whole share? Would she purchase in a second month given the information provided below Month - Price - Amount - S. Bought 1. $5.00. $5,000. 1,000 2. $6.45 A. 550. B. 775. C. 410. D. 824.

Answer 30

A. 550. With value averaging the objective in month two is to have $10,000 in the account. Therefore $10,000 / $6.45 =1,550 shares that should be owned then which means by 550 (1,550 - 1,000) shares to add to the thousand shares owned after month one.

Question 31

Which of these is not one of the three enemies of investment strategy? A. Inadequate time horizons. B. Contrarian sentiment. C. Unrealistic expectations. D. Emotional and undisciplined investors.

Answer 31

B. Contrarian sentiment. Three of the biggest enemies of effective investment strategy is inadequate, time, horizons, emotional, and undisciplined, investors and unrealistic expectations

Question 32

Which one of these is not a type of bond strategy? A. Barbell B. Put to call. C. Tax swap. D. Pure yield pickup swap.

Answer 32

B. Put to call.

Question 33

Modern value investors continue to look for all of the following practices from Benjamin Graham, except A. Low PE ratios. B. High dividend yields. C. High price to sales ratios. D. Low price to book ratios.

Answer 33

C. High price to sales ratios. Value investors look for relatively low PE ratios low price to book ratios and high dividend yields

Question 34

Mark was offered participation in a nonqualified stock option plan. If he were to choose this form of additional compensation over an incentive stock option plan which one of the following statements would apply to him A. He would have an alternative minimum tax preference item for the bargain element of the option. B. He must recognize ordinary income, no later than the date the option is exercised. C. If the plan discriminates in favor of highly compensated employees he would be taxed at the time the option is granted. D. If the plan does not discriminate in favor of highly compensated employees, he can defer income until the sell of the underlying stock.

Answer 34

B. He must recognize ordinary income, no later than the date the option is exercised.

Question 35

Equity based compensation plans may A. Be established for executives only and do not have to cover rank and file employees and are therefore not generally subject to ER ISA requirements. B. Be established for executives only and do not have to cover rank and file employees and are therefore subject to ERISA requirements. C. Not be established for executives only and must also cover rank and file employees and are therefore not generally subject to ERISA requirements. D. Not be established for executives only and must also cover rank and file employees and are therefore subject to ERISA requirements.

Answer 35

A. Be established for executives only and do not have to cover rank and file employees and are therefore not generally subject to ER ISA requirements. Equity base compensation plans may be established for executives only and do not have to cover rank and file employees as a general rule equity based compensation plans are not subject to the coverage and participation and other requirements of the employee retirement income security act of 1974 ERISA because they are not considered to be employee benefit plans That is employee pension plans or employee welfare benefit plan subject to the requirements of ERISA

Question 36

Which of the following is not an itemized deduction? A. Home mortgage interest. B. Charitable contributions. C. Capital losses. D. State and local income taxes.

Answer 36

C. Capital losses. Capital losses up to $3000 of the loss may be used to reduce ordinary income. The other items are allowable itemized deductions.

Question 37

Which one of the following is a tax preference item or adjustment for purposes of the alternative minimum tax? A. Qualified mortgage interest. B. Student loan interest deduction C. Penalty on early withdrawal of savings. D. Tax exempt interest on private activity municipal bonds issued in 2007.

Answer 37

D. Tax exempt interest on private activity municipal bonds issued in 2007.

Question 38

A self-employed client opens a SEP IRA on the advice of her investment professional the most immediate effect on her tax situation for this year is A. Tax avoidance. B. Tax transfer. C. Tax deferral. D. Tax reduction.

Answer 38

D. Tax reduction.

Question 39

Mrs. Arbuckle paid approximately $23,500 or 23.5% of her taxable income of $100,000 to the IRS. What does this percentage represent? A. Compound annual tax rate. B. Marginal tax rate. C. Average tax rate. D. Tax surcharge.

Answer 39

C. Average tax rate. The average tax rate is defined as the tax liability divided by the taxable income

Question 40

Bob received 100 shares of stock from his uncle Raymond. Raymond purchased the stock eight years ago for $12 per share. Bob received the stock as a gift from uncle Raymond. Two years ago with the fair market value of the stock was $15 per share assume Bob sold the stock this year for $19 per share what would be Bob’s basis in the shares? A. $12 per share. B. $15 per share. C. $19 per share. D. $7 per share.

Answer 40

A. $12 per share. In the case of an asset received as a gift if the fair market value on the date of the gift is greater than the donors adjusted basis the recipient has a carryover basis. In this case Uncle Raymond had purchased the stock for $12 per share and had gifted it to Bob with the fair market value was $15 per share . Bob subsequently sold the stock for $19 per share. Thus the carryover basis from uncle Raymond would be $12 per share.