AWMA Practice Exam II

Using the capital asset pricing model, what is the expected return for a stock where its beta is 1.20, the risk-free rate is 4%, and the market rate of return is 10%? (Set calculator for four decimal places to reduce rounding error.) A)11.2% B)8.8% C)10.1% D)16.0% - Answer- A .04 + 1.2 (.10 − .04) = .04 + .072 = .112 or 11.2% Which of these is NOT a general rule pertaining to investing in small firms? A)Look for low volatility stocks B)Diversify among 20 to 30 different issues C)Have a long-term time horizon D)Avoid turnover of more than 30% annually - Answer- A Investors in small firms need to expect volatility and have a long-term time horizon. Gerald Perritt recommends investing in between 20 and 30 different issues, and turnover should be limited to no more than 30% annually in order to control transaction costs. Special arrangements need to be made concerning the residence and contents of the high net worth individual's primary residence for which situation? A)When the owner is planning to live overseas for a year B)When the owner is taking a month to travel through Europe C)When the owner is on vacation for a week D)When the owner is at their vacation home for two weeks - Answer- A When the primary residence will be vacant for a short time, homeowners policies will continue to provide coverage. However, when the owner will be out of the country for a year, the property may be considered vacant and coverage may not apply. Specialty insurance carriers who commonly deal with situations such as clients who live internationally for periods of time can reduce the likelihood that a significant risk is overlooked. These companies often provide risk managers who can properly advise clients concerning their choices. Your client is currently subject to the Medicare contribution tax. Which method may help reduce the impact of the Medicare contribution tax? A)Receiving passive business income B)Receiving municipal bond interest C)Capturing capital gain income D)Maximizing the use of charitable contribution deductions. - Answer- B