STC SERIES 66 CHAPTER 12 TEST
COMPLETE QUESTIONS AND ANSWERS
WITH VERIFIED SOLUTIONS LATEST
UPDATE 2025/2026
When creating a portfolio for a client, an investment adviser first determines the
client's investment objectives and risk tolerance. Based on this information, the
adviser then constructs a portfolio containing specific percentages of uncorrelated
investments. On a periodic basis thereafter, the adviser readjusts the portfolio to
maintain the original investment mix. This approach is best described as: -
CORRECT ANSWER - Strategic asset allocation
The allocation of assets into an optimal portfolio based on a client's risk tolerance
and investment objectives is called strategic asset allocation. In theory, it is the best
mix of assets, given the client's goals and level of risk aversion. Most strategic
asset allocators also periodically rebalance the portfolio to restore the original asset
mix
Company A has a high price-to-book value ratio and a high price-to-earnings ratio.
Company B has a low price-to-book value ratio and a low price-to-earnings ratio.
What does this indicate about each company's stock? - CORRECT ANSWER -
Stock A is a growth stock and Stock B is a value stock.
A growth stock tends to have high price-to-book value ratio and a high P/E ratio.
Conversely, a value stock tends to have low price-to-book value ratio and a low
P/E ratio.
An adviser is comparing two bonds of similar credit quality and duration for a
client. The client is seeking a yield of 7.2%. After performing discounted cash flow
analysis on each bond, the adviser has determined that Bond A is trading at a
premium to its present value, while Bond B is trading at a discount to its present
value. Which TWO of the following statements are TRUE?
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, Bond A is priced attractively and should be purchased.
Bond B is priced attractively and should be purchased.
The investor will earn an annual interest rate greater than 7.2% with Bond A.
The investor will earn an annual interest rate greater than 7.2% with Bond B. -
CORRECT ANSWER - II and IV
Discounted cash flow (DCF) analysis evaluates the present value of all coupon
payments and the repayment of a bond's principal at a present value, based on a
rate of return. This makes it possible to evaluate a bond's value against the
investor's desired rate of return. The sum of each of the discounted cash flows, plus
the present value of the bond's principal, determine the total value of the bond. By
comparing this value to the current price of the bond, the adviser will be able to
determine if the bond is an attractive investment for a client.
If a bond is trading at a discount to its present value, the investor will earn more
than the interest rate that has been used to calculate the present value. Conversely,
a bond that is trading at a premium to its total present value will be worth less than
the price of the bond. (The investor would be overpaying for the bond.)
If an adviser wanted to determine a company's ability to pay debts that would be
maturing in one year, the adviser would be most interested in the: - CORRECT
ANSWER - Current ratio
The current ratio is a comparison of current assets to current liabilities for a one-
year period. The acid-test ratio excludes inventories and usually is for a one- to
three-month period
Currently, the price of gold is increasing as the price of Treasury bills is declining.
These two assets are considered: - CORRECT ANSWER - Negatively correlated
When two investments are moving in the opposite direction, they are said to be
negatively correlated. Those that move in the same direction are correlated. Those
that show no pattern of correlation are uncorrelated.
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COMPLETE QUESTIONS AND ANSWERS
WITH VERIFIED SOLUTIONS LATEST
UPDATE 2025/2026
When creating a portfolio for a client, an investment adviser first determines the
client's investment objectives and risk tolerance. Based on this information, the
adviser then constructs a portfolio containing specific percentages of uncorrelated
investments. On a periodic basis thereafter, the adviser readjusts the portfolio to
maintain the original investment mix. This approach is best described as: -
CORRECT ANSWER - Strategic asset allocation
The allocation of assets into an optimal portfolio based on a client's risk tolerance
and investment objectives is called strategic asset allocation. In theory, it is the best
mix of assets, given the client's goals and level of risk aversion. Most strategic
asset allocators also periodically rebalance the portfolio to restore the original asset
mix
Company A has a high price-to-book value ratio and a high price-to-earnings ratio.
Company B has a low price-to-book value ratio and a low price-to-earnings ratio.
What does this indicate about each company's stock? - CORRECT ANSWER -
Stock A is a growth stock and Stock B is a value stock.
A growth stock tends to have high price-to-book value ratio and a high P/E ratio.
Conversely, a value stock tends to have low price-to-book value ratio and a low
P/E ratio.
An adviser is comparing two bonds of similar credit quality and duration for a
client. The client is seeking a yield of 7.2%. After performing discounted cash flow
analysis on each bond, the adviser has determined that Bond A is trading at a
premium to its present value, while Bond B is trading at a discount to its present
value. Which TWO of the following statements are TRUE?
1|Page
, Bond A is priced attractively and should be purchased.
Bond B is priced attractively and should be purchased.
The investor will earn an annual interest rate greater than 7.2% with Bond A.
The investor will earn an annual interest rate greater than 7.2% with Bond B. -
CORRECT ANSWER - II and IV
Discounted cash flow (DCF) analysis evaluates the present value of all coupon
payments and the repayment of a bond's principal at a present value, based on a
rate of return. This makes it possible to evaluate a bond's value against the
investor's desired rate of return. The sum of each of the discounted cash flows, plus
the present value of the bond's principal, determine the total value of the bond. By
comparing this value to the current price of the bond, the adviser will be able to
determine if the bond is an attractive investment for a client.
If a bond is trading at a discount to its present value, the investor will earn more
than the interest rate that has been used to calculate the present value. Conversely,
a bond that is trading at a premium to its total present value will be worth less than
the price of the bond. (The investor would be overpaying for the bond.)
If an adviser wanted to determine a company's ability to pay debts that would be
maturing in one year, the adviser would be most interested in the: - CORRECT
ANSWER - Current ratio
The current ratio is a comparison of current assets to current liabilities for a one-
year period. The acid-test ratio excludes inventories and usually is for a one- to
three-month period
Currently, the price of gold is increasing as the price of Treasury bills is declining.
These two assets are considered: - CORRECT ANSWER - Negatively correlated
When two investments are moving in the opposite direction, they are said to be
negatively correlated. Those that move in the same direction are correlated. Those
that show no pattern of correlation are uncorrelated.
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