Wealth Management
Midterm Exam
Course Introduction
Wealth Management is a comprehensive course designed to introduce students to the principles and practices involved in managing personal and institutional wealth. The course covers a broad spectrum of topics, including investment strategies, asset allocation, risk assessment, tax planning, retirement planning, estate planning, and ethical considerations in wealth advisory services. Through case studies and practical scenarios, students learn how to develop customized financial plans that align with client objectives, adapt to changing markets, and integrate global economic factors. By the end of the course, students will have gained the skills necessary to advise clients on building, preserving, and transferring wealth effectively.
Recommended Textbook Investment Analysis and Portfolio Management 11th Edition by Frank K. Reilly
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22 Chapters
2045 Verified Questions
2045 Flashcards
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Chapter 1: The Investment Setting
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Sample Questions
Q1) Nominal rates are averages of all possible real rates.
A)True
B)False
Answer: False
Q2) What will happen to the security market line (SML) if the following events occur, other things constant: (1) inflation expectations increase, and (2) investors become more risk averse?
A) shift up and keep the same slope
B) shift up and have less slope
C) shift up and have a steeper slope
D) shift down and keep the same slope
E) shift down and have less slope
Answer: C
Q3) The variance of expected returns is equal to the square root of the expected returns.
A)True
B)False
Answer: False
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Chapter 1: The Investment Setting: Part A
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Sample Questions
Q1) Refer to Exhibit 1A.2. The expected return for project X is
A) 0.0 percent.
B) 0.5 percent.
C) 2.5 percent.
D) 5.0 percent.
E) 7.5 percent.
Answer: C
Q2) Refer to Exhibit 1A.1. The coefficient of variation of this investment is
A) -0.06.
B) -0.65.
C) 6.60.
D) 16.53.
E) 165.10.
Answer: D
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Chapter 2: Asset Allocation and Security Selection
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Sample Questions
Q1) John is 55 years old and has $55,000 outstanding on a mortgage and no other debt. John typically saves $5,000 in an IRA account and another $10,000 in a company pension. John is most likely in the A) discovery phase.
B) accumulation phase.
C) consolidation phase.
D) spending phase.
E) gifting phase.
Answer: C
Q2) The current outlay of money to guard against a potentially large future loss is commonly known as A) asset management.
B) portfolio management.
C) minimizing risk.
D) loss control.
E) insurance.
Answer: E
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Page 5
Chapter 2: Asset Allocation and Security Selection: Part A
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Sample Questions
Q1) What is the correlation coefficient for two assets with a covariance of .0032, if asset 1 has a standard deviation of 12 percent and asset 2 has a standard deviation of 9 percent?
A) 0.2963
B) 0.3456
C) 0.8721
D) 1.5980
Q2) Refer to Exhibit 2A.1. Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
Q3) Refer to Exhibit 2A.1. Calculate the coefficient of correlation.
A) -0.456
B) -0.354
C) 0.000
D) 0.456
E) 3.538
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Page 6
Chapter 3: Organization and Functioning of Securities Markets
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Sample Questions
Q1) Call markets can also be used at the opening for stocks on any exchange if there is an overnight buildup of buy and/or sell orders.
A)True
B)False
Q2) In a dealer market trading system, shares of stock are sold to the investor with the highest bid price and bought from the seller with the lowest offering price.
A)True
B)False
Q3) Suppose you purchase 200 shares of Best Hat Corporation at $52 a share by making a margin deposit of 50 percent. If the maintenance margin is 30 percent, at what price will you receive a margin call?
A) $37.14
B) $37.95
C) $38.23
D) $38.76
E) $39.42
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Chapter 4: Security Market Indexes and Index Funds
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Sample Questions
Q1) Refer to Exhibit 4.2. What is the divisor at the beginning of January 16th?
A) 1.9375
B) 3.0
C) 2.5
D) 2.2734
E) 3.2852
Q2) The actual index movements are typically based on the arithmetic mean of the percent changes in price or value for the stocks in the
A) equally-weighted index.
B) price-weighted index.
C) unweighted index.
D) value-weighted index.
E) over-weighted index.
Q3) Which of the following is NOT a use of security market indicator series?
A) to use as a benchmark of individual portfolio performance
B) to develop an index portfolio
C) to determine factors influencing aggregate security price movements
D) to use in the measurement of systematic risk
E) to use in the measurement of diversifiable risk
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Chapter 5: Efficient Capital Markets, Behavioral Finance, and Technical Analysis
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Sample Questions
Q1) To a technician that believed in the importance of volume, a bullish signal would occur when
A) prices increase on light volume.
B) prices decrease on light volume.
C) prices increase on heavy volume.
D) prices decrease on heavy volume.
E) prices increase on declining volume.
Q2) A contrary opinion technician would buy stock when mutual funds
A) are at the market peak.
B) are fully invested.
C) have a cash ratio approaching 4 percent.
D) have a cash ratio approaching 7 percent.
E) have a cash ratio approaching 11 percent.
Q3) A divergence between an increase in a stock market series and the rest of the stock market can be detected using
A) debit balances in brokerage accounts.
B) short interest.
C) the advance-decline line.
D) confidence index.
E) investor sentiment.
Page 9
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) All of the following questions remain to be answered in the real world EXCEPT
A) What is a good proxy for the market portfolio?
B) What happens when you cannot borrow or lend at the risk-free rate?
C) How good is the capital asset model as a predictor?
D) What is the beta of the market portfolio of risky assets?
E) What is the stability of beta for individual stocks?
Q2) Refer to Exhibit 6.2. What is the expected return of a portfolio of two risky assets if the expected return E(R<sub>i</sub>), standard deviation ( \(\sigma\)i), covariance (COV<sub>i,j</sub>), and asset weight (W<sub>i</sub>) are as shown above?
A) 18.64%
B) 20.0%
C) 22.5%
D) 13.65%
E) 11%
Q3) A risk-free asset is one in which the return is completely guaranteed; there is no uncertainty.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management: Part A
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Sample Questions
Q1) Refer to Exhibit 6A.1. What weight of security 1 gives the minimum portfolio variance when r<sub>1.2</sub> = .60, E( \(\sigma\)1) = .10 and E( \(\sigma\)2) = .16?
A) .0244
B) .3679
C) .5697
D) .6309
E) .9756
Q2) Refer to Exhibit 6A.1. Show the minimum portfolio variance for a two-stock portfolio when r<sub>1.2</sub> = 1.
A) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) -E( \(\sigma\)2)]
B) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
C) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
D) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
E) None of these are correct.
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11
Chapter 6: An Introduction to Portfolio Management: Part B
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Sample Questions
Q1) Refer to Exhibit 6B.1. What is the value of W<sub>1</sub> when r<sub>1.2</sub> = -1 and E( \(\sigma\)1) = .10 and E( \(\sigma\)2) = .12?
A) 45.46 percent
B) 50.00 percent
C) 59.45 percent
D) 54.55 percent
E) 74.55 percent
Q2) Refer to Exhibit 6B.1. Show the minimum portfolio variance for a portfolio of two risky assets when r<sub>1.2</sub> = -1.
A) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
B) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
C) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
D) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
E) None of these are correct.
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12
Chapter 7: Asset Pricing Models
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Sample Questions
Q1) The existence of transaction costs indicates that at some point the additional cost of diversification relative to its benefit would be excessive for most investors.
A)True B)False
Q2) Assume the risk-free rate is 4.5 percent and the expected return on the market is 11 percent. You anticipate Stock XYZ to sell for $28 at the end of next year and pay a dividend of $2. The stock is currently selling for $26.50 with a beta of 1.2. You currently hold stock XYZ in a well-diversified portfolio. Assuming you have money to invest, you should
A) buy stock XYZ.
B) sell stock XYZ.
C) do nothing because it is properly valued.
D) invest your money in the risk-free rate of return.
E) buy a put option.
Q3) Correlation of the market portfolio and the zero-beta portfolio will be linear.
A)True B)False
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Chapter 8: Equity Valuation
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Sample Questions
Q1) An overvalued investment is so expensive that we will not receive a fair return if we bought it.
A)True
B)False
Q2) Refer to Exhibit 8.5. Assume that the annual dividend grows at a constant rate of 9 percent indefinitely instead of the supernormal growth. How much is the stock worth if dividends grow annually at 9 percent?
A) $40.00
B) $43.60
C) $45.60
D) $47.80
E) $52.40
Q3) Which of the following is correct?
A) if estimated value > Market price, you should buy.
B) if estimated value > Market price, you should sell.
C) if estimated value < Market price, you should do nothing.
D) if estimated value < Market price, you should buy.
E) if estimated value > Market price, you should do nothing.
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14
Chapter 9: The Top-Down Approach to Market, Industry, and Company Analysis
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Sample Questions
Q1) One of the economic series included in the Conference Board coincident indicator is the index of industrial production.
A)True
B)False
Q2) Operating free cash flow and free cash flow to equity are equivalent cash flow concepts.
A)True
B)False
Q3) The price/cash flow ratio has grown in prominence and use for valuing firms because many analysts contend that a firm's cash flow is less subject to manipulation than the firm's earnings per share.
A)True
B)False
Q4) Coincident indicators include economic time series that have peaks and troughs that roughly occur at the same time as the peaks and troughs of overall economic activity.
A)True
B)False
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Chapter 10: The Practice of Fundamental Investing
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Sample Questions
Q1) The key issues that investors seem to care about with respect to a board include all of the following, EXCEPT
A) the size of the board.
B) stratthe independence of the board.
C) how the board responds to shareholder proposals.
D) separation of the CEO and board chair positions.
E) how management is compensated.
Q2) The fee paid to the underwriter is called the
A) tactical spread.
B) net spread.
C) gross spread.
D) listing fee.
E) banking fee.
Q3) When a company acquires another public company, it typically pays a significant premium above the previous market price.
A)True
B)False
Q4) A stock pitch is like a book report or a news report.
A)True
B)False
Page 16
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Chapter 11: Equity Portfolio Management Strategies
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Sample Questions
Q1) Which of the following statements concerning active equity portfolio management strategies is true?
A) The goal of active equity portfolio management is to earn a portfolio return that exceeds the return of a passive benchmark portfolio (net of transaction costs) on a risk-adjusted basis.
B) An actively managed equity portfolio has lower total transaction costs.
C) An actively managed equity portfolio has lower risk than the passive benchmark.
D) A key to success for an actively managed equity portfolio is to maximize trading activity.
E) An actively managed equity portfolio has lower turnover.
Q2) The integrated asset allocation strategy separately examines capital market conditions and the investor's objectives and constraints.
A)True
B)False
Q3) Active portfolio managers just try to capture the expected return consistent with the risk level of their portfolios.
A)True
B)False
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Chapter 12: Bond Fundamentals and Valuation
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Sample Questions
Q1) Calculate the yield to maturity of a zero-coupon bond with a face value of $1000, maturing in 15 years and selling for a price of $525.75.
A) 5.62 percent
B) 4.38 percent
C) 8.74 percent
D) 15.26 percent
E) 16.27 percent
Q2) Revenue bonds are essentially backed by the full faith and credit of the issuer and its entire taxing power.
A)True
B)False
Q3) The three major theories explaining the term structure of interest rates are the expectations hypothesis, the liquidity differential hypothesis, and the segmented quality hypothesis.
A)True
B)False
Q4) Bonds rated BB or above are considered to be investment-grade bonds.
A)True
B)False
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Chapter 13: Bond Analysis and Portfolio Management Strategies
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Sample Questions
Q1) Convexity is a measure of how much a bond's price-yield curve deviates from the linear approximation of that curve.
A)True
B)False
Q2) Calculate the modified duration for a 10-year, 12 percent bond with a yield to maturity of 10 percent and a Macaulay duration of 7.2 years.
A) 6.43 years
B) 6.55 years
C) 6.79 years
D) 6.86 years
E) 7.01 years
Q3) A swap relies heavily on interest rate expectations.
A)True
B)False
Q4) The breakeven yield is the same as the implied forward rate.
A)True
B)False
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Chapter 14: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) Investment costs are generally higher in the derivative markets than in the corresponding cash markets.
A)True
B)False
Q2) Forward contracts do not require an upfront premium.
A)True
B)False
Q3) Intrinsic value represents the value
A) the seller could extract from the option if they exercised it immediately.
B) the buyer could extract from the option if they exercised it immediately.
C) seller pays for the time premium.
D) buyer pays for time premium.
E) below zero.
Q4) Holding a put option and the underlying security at the same time is an example of A) a collar.
B) a straddle.
C) income generation.
D) portfolio insurance.
E) a reverse collar.
Page 20
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Chapter 15: Forward, Futures, and Swap Contracts
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Sample Questions
Q1) Like hedging, arbitrage results in increased returns with a disproportional increase in risk.
A)True
B)False
Q2) Refer to Exhibit 15.18. Suppose that three-month LIBOR is 4.0 percent on the rate determination day, and the contract specified settlement in advance, describe the transaction that occurs between the dealer and TexMex.
A) The dealer is obligated to pay TexMex $61,881.
B) The dealer is obligated to pay TexMex $61,500.
C) TexMex is obligated to pay the dealer $247,524.
D) TexMex is obligated to pay the dealer $246,000.
E) TexMex is obligated to pay the dealer $56,000.
Q3) Refer to Exhibit 15.12. Calculate the current price of the futures contract.
A) 1295.66
B) 1304.34
C) 1342.75
D) 1379.29
E) 1393.49
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Chapter 16: Option Contracts
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Sample Questions
Q1) The conversion price parity for a convertible bond is defined as
A) Market Price of Convertible Bond / Conversion Ration.
B) Market Price of Convertible Bond * Conversion Ration.
C) Market Price of Convertible Bond - Conversion Ration.
D) Market Price of Convertible Bond + Conversion Ration.
E) None of these are correct.
Q2) An advantage of convertible bonds is
A) investors get the upside potential of a bond.
B) investors get the upside potential of a stock.
C) issuing firms can get a lower rate of interest on its debt.
D) a and b
E) b and c
Q3) Refer to Exhibit 16.6. What would the net value of a protective put position be if the stock price at expiration is $35?
A) $3.10
B) $30.15
C) $32.10
D) $34.05
E) $35.00
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) An open-end investment company differs from a closed-end investment company by the way they operate after the initial public offering.
A)True
B)False
Q2) All investment firms charge annual management fees to compensate the professional manager of the fund.
A)True
B)False
Q3) Net asset value (NAV) is determined by
A) the total market value of all its assets multiplied by the number of fund shares outstanding.
B) the total market value of all its assets divided by the number of fund shares outstanding.
C) the total market value of all its assets divided by the number of shareholders.
D) supply and demand for the investment company stock in the secondary market.
E) supply and demand for the investment company stock in the primary market.
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) For a poorly diversified portfolio the appropriate measure of portfolio performance would be
A) the Treynor measure because it evaluates portfolio performance on the basis of return and diversification.
B) the Sharpe measure because it evaluates portfolio performance on the basis of return and diversification.
C) the Treynor measure because it uses standard deviation as the risk measure.
D) the Sharpe measure because it uses beta as the risk measure.
E) the Jensen measure because it measures the risk-adjusted performance.
Q2) A portfolio manager should be evaluated many times and in a variety of market environments before a final judgment is reached regarding his/her strengths and weaknesses.
A)True
B)False
Q3) Refer to Exhibit 18.10. Calculate TI's selectivity.
A) 0.0113
B) 0.1200
C) 0.0687
D) 0.0530
E) 0.0696
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