AWMA Practice Exam I questions with verified
answers
A company is planning to borrow large amounts of money to finance a
major expansion. This company is increasing which type of risk?
A) Financial risk
B) Systematic risk
C) Interest rate risk
D) Market risk Ans✓✓✓ A
An increase in debt increases a company's financial risk, which is a form
of unsystematic risk. Systematic risks, including interest rate risk and
market risk, are not company specific risks.
According to guidelines developed by Gerald Perritt, which of these
best describes a sound small stock investment strategy?
A)20 to 30 issues, 3- to 5-year holding period, high ownership stake by
management
B)30 issues or more, 5- to 8-year holding period, buy and hold
C)12 issues or more, 1- to 3-year holding period, sell when institutional
ownership reaches 40%
D)12 or more carefully selected issues, 1-year holding period or longer,
turnover of 30% or less Ans✓✓✓ A
,Perritt's guidelines for buying small stocks include 20 to 30 issues, a 3-
to 5-year holding period, and high ownership stake by management.
Perritt recommends selling small stocks when 40% or more of the
shares become owned by institutional investors.
According to John Brown in his book Exit Planning: The Definitive Guide,
when ranking the four most commonly used exit planning strategies
from most utilized to least utilized, the order is
A)insider transfer, third-party transfer, transfer to children, ESOP.
B)ESOP, transfer to children, third-party transfer, insider transfer.
C)transfer to children, insider transfer, third-party transfer, ESOP.
D)insider transfer, transfer to children, third-party transfer, ESOP.
Ans✓✓✓ A
Insider transfer = 41% of the time, third-party transfer = 29% of the
time, transfer to children = 24% of the time, and ESOP transfers = 1.2%
of the time.
According to the investment pyramid, which one of these sequences is
correct in terms of increasing safety of principal (least to most safety of
principal)?
A)Limited partnerships, Treasury securities, high-grade corporate bonds
B)Futures contracts, balanced mutual funds, EE bonds
C)Variable annuities, puts and calls, money market accounts
D)Gold, high-grade municipal bonds, growth mutual funds Ans✓✓✓ B
,In terms of increased safety of principal, of the four sequences given,
the investment pyramid in the study materials shows futures contracts
(least safety), balanced mutual funds, EE bonds (most safety with
principal guaranteed by the U.S. government) is the correct sequence.
An investor in improved land (with an office building) is concerned most
with which factor?
A)Reselling the property within three years
B)Cash flow expected to be generated by the property
C)Commissions paid to purchase the property
D)Net income of the investment Ans✓✓✓ B
Cash flow is much more important than net income to a real estate
investor. Net income includes the depreciation deduction, which is a
noncash item. Many real estate investors like to have a net loss for
taxes, but do not want to have a net economic loss on a cash basis. Real
estate is a long-term investment, generally requiring a holding period
greater than three years. Although the commissions paid on a property
are important, most real estate investors know that the commissions
are high and accept that fact in their financial projections. The
commissions on purchase and sale are relatively unimportant
compared to the property's cash flow during the holding period.
Assume the following asset classes have the correlations to U.S. large-
cap stocks shown below:
, Commodities: .53
Emerging market stocks: .80
Bonds: −.26
Small stocks: .26
Which statement correctly identifies the relative impact of
diversification between when these assets are added to U.S. large-cap
stocks?
A) Small stocks provide less diversification than bonds.
B) Emerging market stocks provide greater diversification than
commodities.
C) Bonds provide less diversification than commodities.
D) Small stocks provide greater diversification than bonds. Ans✓✓✓ A
The asset that provides the most diversification from U.S. large-cap
stocks is the one furthest from +1.0, moving toward −1. In this case the
correct statement is that small stocks (+.26) provide less diversification
than bonds (−.26), which have a negative correlation to U.S. large-cap
stocks.
Assume you own XYZ Stock Fund that returned 14% over the past five
years, during which the stock market returned 12%. This fund has a
beta of 1.1 and the risk-free rate of return is 4%. What is Jensen's alpha
for this fund?
A)9.1
B)6.0
answers
A company is planning to borrow large amounts of money to finance a
major expansion. This company is increasing which type of risk?
A) Financial risk
B) Systematic risk
C) Interest rate risk
D) Market risk Ans✓✓✓ A
An increase in debt increases a company's financial risk, which is a form
of unsystematic risk. Systematic risks, including interest rate risk and
market risk, are not company specific risks.
According to guidelines developed by Gerald Perritt, which of these
best describes a sound small stock investment strategy?
A)20 to 30 issues, 3- to 5-year holding period, high ownership stake by
management
B)30 issues or more, 5- to 8-year holding period, buy and hold
C)12 issues or more, 1- to 3-year holding period, sell when institutional
ownership reaches 40%
D)12 or more carefully selected issues, 1-year holding period or longer,
turnover of 30% or less Ans✓✓✓ A
,Perritt's guidelines for buying small stocks include 20 to 30 issues, a 3-
to 5-year holding period, and high ownership stake by management.
Perritt recommends selling small stocks when 40% or more of the
shares become owned by institutional investors.
According to John Brown in his book Exit Planning: The Definitive Guide,
when ranking the four most commonly used exit planning strategies
from most utilized to least utilized, the order is
A)insider transfer, third-party transfer, transfer to children, ESOP.
B)ESOP, transfer to children, third-party transfer, insider transfer.
C)transfer to children, insider transfer, third-party transfer, ESOP.
D)insider transfer, transfer to children, third-party transfer, ESOP.
Ans✓✓✓ A
Insider transfer = 41% of the time, third-party transfer = 29% of the
time, transfer to children = 24% of the time, and ESOP transfers = 1.2%
of the time.
According to the investment pyramid, which one of these sequences is
correct in terms of increasing safety of principal (least to most safety of
principal)?
A)Limited partnerships, Treasury securities, high-grade corporate bonds
B)Futures contracts, balanced mutual funds, EE bonds
C)Variable annuities, puts and calls, money market accounts
D)Gold, high-grade municipal bonds, growth mutual funds Ans✓✓✓ B
,In terms of increased safety of principal, of the four sequences given,
the investment pyramid in the study materials shows futures contracts
(least safety), balanced mutual funds, EE bonds (most safety with
principal guaranteed by the U.S. government) is the correct sequence.
An investor in improved land (with an office building) is concerned most
with which factor?
A)Reselling the property within three years
B)Cash flow expected to be generated by the property
C)Commissions paid to purchase the property
D)Net income of the investment Ans✓✓✓ B
Cash flow is much more important than net income to a real estate
investor. Net income includes the depreciation deduction, which is a
noncash item. Many real estate investors like to have a net loss for
taxes, but do not want to have a net economic loss on a cash basis. Real
estate is a long-term investment, generally requiring a holding period
greater than three years. Although the commissions paid on a property
are important, most real estate investors know that the commissions
are high and accept that fact in their financial projections. The
commissions on purchase and sale are relatively unimportant
compared to the property's cash flow during the holding period.
Assume the following asset classes have the correlations to U.S. large-
cap stocks shown below:
, Commodities: .53
Emerging market stocks: .80
Bonds: −.26
Small stocks: .26
Which statement correctly identifies the relative impact of
diversification between when these assets are added to U.S. large-cap
stocks?
A) Small stocks provide less diversification than bonds.
B) Emerging market stocks provide greater diversification than
commodities.
C) Bonds provide less diversification than commodities.
D) Small stocks provide greater diversification than bonds. Ans✓✓✓ A
The asset that provides the most diversification from U.S. large-cap
stocks is the one furthest from +1.0, moving toward −1. In this case the
correct statement is that small stocks (+.26) provide less diversification
than bonds (−.26), which have a negative correlation to U.S. large-cap
stocks.
Assume you own XYZ Stock Fund that returned 14% over the past five
years, during which the stock market returned 12%. This fund has a
beta of 1.1 and the risk-free rate of return is 4%. What is Jensen's alpha
for this fund?
A)9.1
B)6.0
