HS 328 - Investments Exam Study Guide
Which of the following advisors must register with the U.S. Securities and Exchange
Commission (SEC)?
1. An advisor who sells insurance products
2. An advisor who is registered with the state securities regulator
3. An advisor who manages over $100 million in assets
4. An advisor who declines to be regulated by FINRA - ANSWER 3. An advisor who
manages over $100 million in assets
NOTE:
Advisors with at least $100 million in assets under management must register with the
SEC.
Advisors with less than $100 million in assets under management must register with
their respective state regulator.
Jerry would like to purchase shares of a large, established company. He will most likely
make his purchase:
1. in the primary market.
2. from an underwriter.
3. in the secondary market.
4. from the issuing corporation. - ANSWER Newly issued shares are sold in the primary
market, with the assistance of an underwriter.
The purchase and sale of securities that have already passed through the primary
market occurs in the secondary market.
A: The shares of a large, established company have likely been through the primary
market many years ago and are currently trading in the secondary market.
A stock market participant that buys shares of stock in a secondary market and holds
shares as part of its inventory is most likely a(n)
A. stock exchange.
B. independent advisor.
C. broker-dealer.
,D. self-regulatory organization. - ANSWER C. Broker dealers serve two functions: to act
as an intermediary in helping clients buy and sell securities and to generate a profit on
the trading of undervalued securities. In their dealer function, broker-dealers can hold
inventory when they believe the shares are undervalued with the intent of selling them at
a later date when the price rises.
All of the following is (are) among the responsibilities of FINRA EXCEPT:
1. educating investors.
2. fostering market transparency.
3. writing and enforcing rules governing the activities of all registered broker-dealer
4. firms and registered brokers in the U.S. writing and enforcing rules governing the
activities of all registered investment advisors. - ANSWER 4. The SEC and state
securities regulators are responsible for regulation of registered
investment advisors.
Which of the following is most likely classified as a primary market transaction?
1. A mortgage-backed security (MBS) purchased from an institution that originates the
mortgage loans
2. Equity shares purchased on the floor of the New York Stock Exchange
3. Corporate bond purchased from endowment fund that is liquidating
4. Shares of preferred stock that are purchased from a dealer - ANSWER A: 1. Primary
market transactions are those in which the financial securities are created, which would
include the creation of an MBS by the originating institution. The equity and preferred
shares and the corporate bond are examples of secondary market transactions.
One of your clients wants to build a portfolio characterized by high liquidity and very low
risk. This client does not mind if the portfolio's returns are low. Given these
specifications,
you might recommend a portfolio consisting primarily of which asset class?
A. Money market instruments
B. Municipal bonds
C. Corporate bonds
D. Equities - ANSWER A: A Money market instruments are the least risky asset class
with the lowest return. Municipal and corporate bonds, as fixed income securities, have
a moderate risk and return profile. Equities tend to offer the highest return as well as
highest risk.
,All of the following are likely to be classified as investment advisers by the U.S.
Securities and Exchange Commission EXCEPT
1. a financial analyst who issues a report on the performance of value stocks.
2. an analyst who recommends a triple-A-rated bond to a client.
3. a money manager who makes asset allocation assignments for institutional investors.
4. a financial firm that acts as a dealer in investment grade bonds. - ANSWER The
correct answer is (4).
Broker-dealers are explicitly excluded from being classified as advisers under the legal
framework of the Investment Advisers Act. Individuals or firms that issue reports or
offer investment advice, including asset-allocation decisions, are considered to fit the
definition of an investment adviser.
Fred bought 100 shares of Apple at $115 per share. One year later, he sold the stock for
$152 per share. During the year, Apple declared and paid dividends of $2 per share.
What
was Fred's holding period return?
1. 32%
2. 34%
3. 73%
4. 206% - ANSWER The correct answer is (B).
(Net proceeds + dividend - interest) ÷ equity invested = HPR
[($152 - $115) + $2] ÷ $115 = 33.91%
Which of the following can be greatly reduced by diversification? 1- Systematic risk
2-Market risk
3-Unsystematic risk
4-Systematic and unsystematic risk - ANSWER 3 - Unsystematic risk, is reduced by
diversification.
Jerry invested in a mutual fund 5 years ago. His returns were 25%, -5%, 10%, 0%, and
50%, respectively.
, What is the difference between the arithmetic average and
the geometric average return over the 5 years?
1 - 0%
2 - 1.1%
3- 1.3%
4- 1.6% - ANSWER The correct answer is (D).
Arithmetic average = 16%
Geometric average = [(1 + 25%) × (1 + -5%) × (1 + 10%) × (1 + 0%) × (1 + 50%)](1/ 5) - 1 =
14.4%
Difference = 16% − 14.4% = 1.6%
Sam's retirement fund is expected to earn a nominal rate of 7 percent, and the inflation
rate is estimated at 3 percent.
What is Sam's real rate of return?
1.43%
2.33%
3.88%
4.00% - ANSWER The correct answer is (C).
Real return = (1.07 ÷ 1.03) − 1 = 3.8835%
Security A has the following returns over 4 years: 4%, 7%, 0%, and -1%. What is the
mean return and the standard deviation (sample) for Security A?
Which of the following advisors must register with the U.S. Securities and Exchange
Commission (SEC)?
1. An advisor who sells insurance products
2. An advisor who is registered with the state securities regulator
3. An advisor who manages over $100 million in assets
4. An advisor who declines to be regulated by FINRA - ANSWER 3. An advisor who
manages over $100 million in assets
NOTE:
Advisors with at least $100 million in assets under management must register with the
SEC.
Advisors with less than $100 million in assets under management must register with
their respective state regulator.
Jerry would like to purchase shares of a large, established company. He will most likely
make his purchase:
1. in the primary market.
2. from an underwriter.
3. in the secondary market.
4. from the issuing corporation. - ANSWER Newly issued shares are sold in the primary
market, with the assistance of an underwriter.
The purchase and sale of securities that have already passed through the primary
market occurs in the secondary market.
A: The shares of a large, established company have likely been through the primary
market many years ago and are currently trading in the secondary market.
A stock market participant that buys shares of stock in a secondary market and holds
shares as part of its inventory is most likely a(n)
A. stock exchange.
B. independent advisor.
C. broker-dealer.
,D. self-regulatory organization. - ANSWER C. Broker dealers serve two functions: to act
as an intermediary in helping clients buy and sell securities and to generate a profit on
the trading of undervalued securities. In their dealer function, broker-dealers can hold
inventory when they believe the shares are undervalued with the intent of selling them at
a later date when the price rises.
All of the following is (are) among the responsibilities of FINRA EXCEPT:
1. educating investors.
2. fostering market transparency.
3. writing and enforcing rules governing the activities of all registered broker-dealer
4. firms and registered brokers in the U.S. writing and enforcing rules governing the
activities of all registered investment advisors. - ANSWER 4. The SEC and state
securities regulators are responsible for regulation of registered
investment advisors.
Which of the following is most likely classified as a primary market transaction?
1. A mortgage-backed security (MBS) purchased from an institution that originates the
mortgage loans
2. Equity shares purchased on the floor of the New York Stock Exchange
3. Corporate bond purchased from endowment fund that is liquidating
4. Shares of preferred stock that are purchased from a dealer - ANSWER A: 1. Primary
market transactions are those in which the financial securities are created, which would
include the creation of an MBS by the originating institution. The equity and preferred
shares and the corporate bond are examples of secondary market transactions.
One of your clients wants to build a portfolio characterized by high liquidity and very low
risk. This client does not mind if the portfolio's returns are low. Given these
specifications,
you might recommend a portfolio consisting primarily of which asset class?
A. Money market instruments
B. Municipal bonds
C. Corporate bonds
D. Equities - ANSWER A: A Money market instruments are the least risky asset class
with the lowest return. Municipal and corporate bonds, as fixed income securities, have
a moderate risk and return profile. Equities tend to offer the highest return as well as
highest risk.
,All of the following are likely to be classified as investment advisers by the U.S.
Securities and Exchange Commission EXCEPT
1. a financial analyst who issues a report on the performance of value stocks.
2. an analyst who recommends a triple-A-rated bond to a client.
3. a money manager who makes asset allocation assignments for institutional investors.
4. a financial firm that acts as a dealer in investment grade bonds. - ANSWER The
correct answer is (4).
Broker-dealers are explicitly excluded from being classified as advisers under the legal
framework of the Investment Advisers Act. Individuals or firms that issue reports or
offer investment advice, including asset-allocation decisions, are considered to fit the
definition of an investment adviser.
Fred bought 100 shares of Apple at $115 per share. One year later, he sold the stock for
$152 per share. During the year, Apple declared and paid dividends of $2 per share.
What
was Fred's holding period return?
1. 32%
2. 34%
3. 73%
4. 206% - ANSWER The correct answer is (B).
(Net proceeds + dividend - interest) ÷ equity invested = HPR
[($152 - $115) + $2] ÷ $115 = 33.91%
Which of the following can be greatly reduced by diversification? 1- Systematic risk
2-Market risk
3-Unsystematic risk
4-Systematic and unsystematic risk - ANSWER 3 - Unsystematic risk, is reduced by
diversification.
Jerry invested in a mutual fund 5 years ago. His returns were 25%, -5%, 10%, 0%, and
50%, respectively.
, What is the difference between the arithmetic average and
the geometric average return over the 5 years?
1 - 0%
2 - 1.1%
3- 1.3%
4- 1.6% - ANSWER The correct answer is (D).
Arithmetic average = 16%
Geometric average = [(1 + 25%) × (1 + -5%) × (1 + 10%) × (1 + 0%) × (1 + 50%)](1/ 5) - 1 =
14.4%
Difference = 16% − 14.4% = 1.6%
Sam's retirement fund is expected to earn a nominal rate of 7 percent, and the inflation
rate is estimated at 3 percent.
What is Sam's real rate of return?
1.43%
2.33%
3.88%
4.00% - ANSWER The correct answer is (C).
Real return = (1.07 ÷ 1.03) − 1 = 3.8835%
Security A has the following returns over 4 years: 4%, 7%, 0%, and -1%. What is the
mean return and the standard deviation (sample) for Security A?
