HS 328 Investments Exam With
Complete Solutions
All of the following is (are) among the responsibilities of FINRA EXCEPT
A)
educating investors.
B)
fostering market transparency.
C)
writing and enforcing rules governing the activities of all registered broker-dealer firms
and registered brokers in the U.S.
D)
writing and enforcing rules governing the activities of all registered investment
advisors. - ANSWER The correct answer is (D).The SEC and state securities regulators
are responsible for regulation of registered investment advisors.
All of the following are likely to be classified as investment advisers by the U.S.
Securities and Exchange Commission (SEC) EXCEPT
A)
a financial analyst who issues a new report on the performance of value stocks directly
to a client.
B)
an analyst who recommends a triple-A-rated bond to a client.
C)
a money manager who makes asset allocation assignments for institutional investors.
D)
a financial firm that acts as a dealer in investment grade bonds. - ANSWER The correct
answer is (D). 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.
Which of the following can be greatly reduced by diversification?
A)
Systematic risk
B)
Market risk
C)
Unsystematic risk
D)
Systematic and unsystematic risk - ANSWER The correct answer is (C).Unsystematic
risk is reduced by diversification.
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?
A)
1.43%
B)
2.33%
C)
3.88%
D)
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?
A)
Mean of 2.5% and standard deviation of 3.2%
B)
Mean of 2.5% and standard deviation of 3.7%
C)
,Mean of 4% and standard deviation of 3.2%
D)
Mean of 4% and standard deviation of 3.7% - ANSWER The correct answer is (B).The
mean is 2.5 percent and the standard deviation is close to 3.7 percent. You can
calculate these using the ∑+ key on a financial calculator.
If an investor owns a single share of a stock with a beta of 0.75, what can you conclude
about his investment risk relative to the market?
A)
The investor's total risk is 3/4 of the risk of the market.
B)
The investor is taking 75 percent more total risk than the risk of the market.
C)
The investor's systematic risk is ³⁄₄ of the risk of the market.
D)
The investor's diversifiable risk is 75% more than the total risk of the market. - ANSWER
The correct answer is (C).Beta only measures systematic risk relative to 1, the market's
beta. Beta assumes a stock is added to an already diversified portfolio. Because a
single stock has both diversifiable as well as systematic risk, an investor who purchases
only a single stock may have a total risk greater than the market's risk.
Maggie considers four potential securities with identical expected returns but different
correlations with her existing portfolio as part of her asset-selection decision. Which
security would provide Maggie with the greatest diversification benefit?
A)
Security 1 with a correlation coefficient of +1.0
B)
Security 2 with a correlation coefficient of +0.32
C)
Security 3 with a correlation coefficient of 0.00
D)
Security 4 with a correlation coefficient of -0.38 - ANSWER The correct answer is
(D).Since the returns of the four potential securities are the same, the primary
, consideration is the risk element. The best security is the one with the lowest
correlation, which is Security 4.
Which of the following is accurate regarding the capital market line (CML)?
A)
The portfolios on the new efficient frontier are some combination of the risk-free asset
and the market portfolio.
B)
The CML is a line that begins at the risk-free rate of return and crosses the efficient
frontier at the market portfolio.
C)
The CML represents the most efficient portfolios of individual stocks.
D)
The slope of the CML is an investor's indifference curve. - ANSWER The correct answer
is (A).
The CML is a combination of the risk-free return and the market portfolio. Option (B) is
incorrect, as the CML does not cross the efficient portfolio, rather it is tangent to it.
Option (C) is incorrect as the CML consists of the market portfolio and the Rf. Option (D)
is incorrect as the slope is the Sharpe Ratio.
Which of the following techniques or strategies would take advantage of a perceived
undervaluation in the energy sector of the economy?
A)
Dollar-cost averaging into a portfolio
B)
Strategic asset allocation rebalancing
C)
Tactical asset allocation
D)
Index funds - ANSWER The correct answer is (C).Tactical asset allocation is in response
to short-term market conditions. Dollar-cost averaging is a method of investing over
time. Strategic asset allocation is a long-term strategy, not one that takes advantage of
sector imbalances.
Complete Solutions
All of the following is (are) among the responsibilities of FINRA EXCEPT
A)
educating investors.
B)
fostering market transparency.
C)
writing and enforcing rules governing the activities of all registered broker-dealer firms
and registered brokers in the U.S.
D)
writing and enforcing rules governing the activities of all registered investment
advisors. - ANSWER The correct answer is (D).The SEC and state securities regulators
are responsible for regulation of registered investment advisors.
All of the following are likely to be classified as investment advisers by the U.S.
Securities and Exchange Commission (SEC) EXCEPT
A)
a financial analyst who issues a new report on the performance of value stocks directly
to a client.
B)
an analyst who recommends a triple-A-rated bond to a client.
C)
a money manager who makes asset allocation assignments for institutional investors.
D)
a financial firm that acts as a dealer in investment grade bonds. - ANSWER The correct
answer is (D). 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.
Which of the following can be greatly reduced by diversification?
A)
Systematic risk
B)
Market risk
C)
Unsystematic risk
D)
Systematic and unsystematic risk - ANSWER The correct answer is (C).Unsystematic
risk is reduced by diversification.
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?
A)
1.43%
B)
2.33%
C)
3.88%
D)
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?
A)
Mean of 2.5% and standard deviation of 3.2%
B)
Mean of 2.5% and standard deviation of 3.7%
C)
,Mean of 4% and standard deviation of 3.2%
D)
Mean of 4% and standard deviation of 3.7% - ANSWER The correct answer is (B).The
mean is 2.5 percent and the standard deviation is close to 3.7 percent. You can
calculate these using the ∑+ key on a financial calculator.
If an investor owns a single share of a stock with a beta of 0.75, what can you conclude
about his investment risk relative to the market?
A)
The investor's total risk is 3/4 of the risk of the market.
B)
The investor is taking 75 percent more total risk than the risk of the market.
C)
The investor's systematic risk is ³⁄₄ of the risk of the market.
D)
The investor's diversifiable risk is 75% more than the total risk of the market. - ANSWER
The correct answer is (C).Beta only measures systematic risk relative to 1, the market's
beta. Beta assumes a stock is added to an already diversified portfolio. Because a
single stock has both diversifiable as well as systematic risk, an investor who purchases
only a single stock may have a total risk greater than the market's risk.
Maggie considers four potential securities with identical expected returns but different
correlations with her existing portfolio as part of her asset-selection decision. Which
security would provide Maggie with the greatest diversification benefit?
A)
Security 1 with a correlation coefficient of +1.0
B)
Security 2 with a correlation coefficient of +0.32
C)
Security 3 with a correlation coefficient of 0.00
D)
Security 4 with a correlation coefficient of -0.38 - ANSWER The correct answer is
(D).Since the returns of the four potential securities are the same, the primary
, consideration is the risk element. The best security is the one with the lowest
correlation, which is Security 4.
Which of the following is accurate regarding the capital market line (CML)?
A)
The portfolios on the new efficient frontier are some combination of the risk-free asset
and the market portfolio.
B)
The CML is a line that begins at the risk-free rate of return and crosses the efficient
frontier at the market portfolio.
C)
The CML represents the most efficient portfolios of individual stocks.
D)
The slope of the CML is an investor's indifference curve. - ANSWER The correct answer
is (A).
The CML is a combination of the risk-free return and the market portfolio. Option (B) is
incorrect, as the CML does not cross the efficient portfolio, rather it is tangent to it.
Option (C) is incorrect as the CML consists of the market portfolio and the Rf. Option (D)
is incorrect as the slope is the Sharpe Ratio.
Which of the following techniques or strategies would take advantage of a perceived
undervaluation in the energy sector of the economy?
A)
Dollar-cost averaging into a portfolio
B)
Strategic asset allocation rebalancing
C)
Tactical asset allocation
D)
Index funds - ANSWER The correct answer is (C).Tactical asset allocation is in response
to short-term market conditions. Dollar-cost averaging is a method of investing over
time. Strategic asset allocation is a long-term strategy, not one that takes advantage of
sector imbalances.
