Wealth Management
Pre-Test Questions
Course Introduction
Wealth Management is a comprehensive course designed to provide students with a thorough understanding of the principles and practices involved in managing individual and family wealth. The course covers topics such as financial planning, investment strategies, risk management, estate planning, tax considerations, retirement planning, and the role of financial advisors. Students will learn how to assess clients financial goals, develop tailored wealth management strategies, and navigate the ethical and regulatory frameworks governing the industry. Through case studies and practical exercises, students will gain the skills necessary to help clients preserve and grow their wealth in an increasingly complex financial landscape.
Recommended Textbook
Analysis of Investments and Mangement of Portfolios International 10th Edition by Reilly
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Chapter 1: An Overview of the Investment Process
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Q1) Refer to Exhibit 1.8.Calculate the HPY for stock 2.
A) 5%
B) 6%
C) 7%
D) 8%
E) 10%
Answer: C
Q2) The increase in yield spreads in late 2008 and early 2009 indicated that
A) Credit risk premiums decreased
B) Market risk premiums increased
C) Investors are more confident of the future cash flows of bonds
D) Non-investment grade bonds are less risky
E) Government bonds are no longer a risk free investment
Answer: B
Q3) An individual who selects the investment that offers greater certainty when everything else is the same is known as a risk averse investor.
A)True
B)False
Answer: True
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Page 3
Chapter 2: The Asset Allocation Decision
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Q1) An appropriate investment objective for a typical 25-year-old investor is a low-risk strategy,such as capital preservation or current income.
A)True
B)False
Answer: False
Q2) Once the portfolio is constructed,it must be continuously
A) Rebalanced.
B) Recycled
C) Reinvested
D) Monitored.
E) Manipulated.
Answer: D
Q3) Experts suggest life insurance coverage should be seven to ten times an individual's annual salary.
A)True
B)False
Answer: True
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Page 4
Chapter 3: The Global Market Investment Decision
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Sample Questions
Q1) A mutual fund:
A) Is priced once a day at the opening of trading.
B) Is priced once a day at the close of trading.
C) Is priced continuously during the trading day.
D) Is priced at the open and close of trading.
E) None of the above.
Answer: B
Q2) REITS are investment companies that invest in high-quality money market instruments such as Treasury bills,high-grade commercial paper,and large CD's.
A)True
B)False
Answer: False
Q3) All of the following are considered fixed income securities except A) Debentures.
B) Eurobonds.
C) Preferred stock.
D) Mutual funds.
E) Yankee bonds.
Answer: D
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Page 5
Chapter 4: Securities Markets: Organization and Operation
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Sample Questions
Q1) Which of the following is <b>not</b> a major category of membership in stock exchanges?
A) Specialist
B) Commission broker
C) Floor broker
D) Financial analyst
E) Registered trader
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) The primary market is where issues are traded between current and potential owners.
A)True
B)False
Q4) If transaction prices are volatile,but long-term prices are stable,this is referred to as price continuity.
A)True
B)False
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Chapter 5: Security-Market Indexes
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Sample Questions
Q1) A value weighted index automatically adjusts for stock splits.
A)True
B)False
Q2) A price weighted series is disproportionately influenced by larger capitalization companies.
A)True
B)False
Q3) A properly selected sample for use in constructing a market indicator series will consider the sample's source,size and
A) Breadth.
B) Average beta.
C) Value.
D) Variability.
E) Dividend record.
Q4) The most common way to test a portfolio manager's performance is to compare the portfolio return to a benchmark.
A)True
B)False
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Chapter 6: Efficient Capital Markets
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Sample Questions
Q1) Evidence supporting the strong-form efficient market hypothesis (EMH)resulted from examining
A) Value Line rankings.
B) Corporate insiders.
C) Stock exchange specialists.
D) Both b and c only.
E) All of the above.
Q2) Refer to Exhibit 6.6.Stock X had an actual return of 14% and Stock X's normal return based on the market's return for the same period was 13.6%.What is Stock X's abnormal rate of return?
A) -0.4%
B) 0.1%
C) 0.4%
D) 4.0%
E) 6.4%
Q3) The weak form of the efficient market hypothesis contends that stock prices fully reflect all public and private information.
A)True
B)False
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Page 8
Chapter 7: An Introduction to Portfolio Management
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Q1) Refer to Exhibit 7.7.What is the expected return of a portfolio of two risky assets if the expected return E(R?),standard deviation (s?),covariance (COV?,?),and asset weight (W?)are as shown above?
A) 5.8%
B) 6.1%
C) 6.9%
D) 7.8%
E) 8.9%
Q2) Increasing the correlation among assets in a portfolio results in an increase in the standard deviation of the portfolio.
A)True B)False
Q3) Refer to Exhibit 7.14.What is the standard deviation of the stock A and B portfolio?
A) 0.0%
B) 0.5%
C) 4.1%
D) 6.9%
E) 20.3%
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Chapter 8: An Introduction to Asset Pricing Models
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Q1) Studies have shown the beta is more stable for portfolios than for individual securities.
A)True
B)False
Q2) Refer to Exhibit 8.3.What is the beta for Radtron using the proxy index?
A) 0.87
B)
Q3) The market portfolio consists of all risky assets.
A)True
B)False
Q4) The introduction of lending and borrowing severely limits the available risk/return opportunities.
A)True
B)False
Q5) The "true" market portfolio is unknown.
A)True
B)False
Page 10
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Chapter 9: Multifactor Models of Risk and Return
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Q1) Under the following conditions,what are the expected returns for stocks Y and Z? \(\begin{array}{ll} \lambda^{0}=0.04 & \mathrm{~b}_{\mathrm{y}, 1}=0.5\\ \mathrm{k}_{1}=0.07 & \mathrm{~b}_{\mathrm{y}, 2}=1.3 \\ \mathrm{k}_{2}=0.05 & \mathrm{~b}_{\mathrm{z}_{, 1}}=1.2 \\ & \mathrm{~b}_{\mathrm{z}, 2}=0.9 \end{array}\)
A) 12.0% and 13.3%
B) 13.5% and 14.2%
C) 13.9% and 15.6%
D) 14.0% and 16.9%
E) 15.8% and 17.3%
Q2) In a multifactor model,confidence risk represents
A) Unanticipated changes in the level of overall business activity.
B) Unanticipated changes in investors' desired time to receive payouts.
C) Unanticipated changes in short term and long term inflation rates.
D) Unanticipated changes in the willingness of investors to take on investment risk.
E) None of the above.
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Chapter 10: Analysis of Financial Statements
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Q1) Some factors that determine business risk include sales variability and debt to equity ratio.
A)True
B)False
Q2) Refer to Exhibit 10.2.What was Star's net profit margin?
A) 2.4% B) 3.8%
Q3) The five major classes of ratios include the following,<b>except</b>
A) Internal liquidity.
B) Risk analysis.
C) Growth analysis.
D) Market performance.
E) Operating performance.
Q4) Financial ratios can be used to estimate systematic risk.
A)True
B)False
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Chapter 11: Security Valuation Principles
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Q1) Refer to Exhibit 11.4.How much should you be willing to pay for the stock if you feel that the 5 percent growth rate can be maintained indefinitely and you require a 17 percent return?
A) $22.16
B) $19.28
C) $21.32
D) $23.63
E) $25.46
Q2) Which of the following statements regarding fundamental and relative valuation techniques is <b>true</b>?
A) Both techniques require an appropriate estimate of the required rate of return and the growth rate.
B) Both techniques require an estimate of future cash flows and a discount rate.
C) Both techniques require an estimate of future cash flows and a growth rate.
D) Both techniques require an estimate of future cash flows, the required rate of return and a growth estimate.
E) All of the above are true.
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Chapter 12: Macroanalysis and Microvaluation of the Stock Market
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Sample Questions
Q1) Interest rate spread,10-year Treasury bonds less federal funds,is listed as a lagging indicator in the National Bureau of Economic Research (NBER).
A)True
B)False
Q2) The multiplier approach for estimating the intrinsic market value of a major stock market series requires the following step(s):
A) Estimating the future earnings per share for the stock market series
B) Estimating the appropriate earnings multiplier for the stock market series
C) Estimating long-run required rates of return and growth rates
D) Both a and b
E) All of the above
Q3) Jensen,Johnson,and Mercer showed that the relationship between stock returns and size and price-to-book ratio holds in periods when monetary policy is
A) Neutral.
B) Tight.
C) Easy.
D) All of the above.
E) None of the above.
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Chapter 13: Industry Analysis
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Q1) The relationship between an economic series such as disposable personal income and retail sales is usually stronger in an industry that has become more specialized.
A)True
B)False
Q2) The fact that all firms in an industry do not move together negates the value of industry analysis.
A)True
B)False
Q3) Which of the following is <b>not</b> a competitive force suggested by Porter?
A) Rivalry among existing competitors
B) Threat of new entrants
C) Threat of substitute products
D) Government and regulatory influences
E) None of the above (that is, all are competitive forces)
Q4) In the rapid accelerating growth stage,profit margins are typically very high.
A)True
B)False
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Chapter 14: Company Analysis and Stock Valuation
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Q1) Refer to Exhibit 14.7.Calculate the present value now (Year 2010)of FCFE during the period of declining growth (that is for years 2015 to 2018).
A) $1,719,119
B) $1,715,784
C) $1,115,195
D) $1,434,903
E) $1,809,171
Q2) Which of the following is <b>not</b> considered a favorable attribute of firms by Peter Lynch?
A) Firm's product is not faddish
B) Firm has a sustainable comparative competitive advantage over its rivals
C) Firm's industry or product has market stability
D) Firm can benefit from cost reductions
E) All of the above are considered favorable attributes by Peter Lynch
Q3) "Economic profit" is analogous to ____ in capital budgeting.
A) Weighted average cost of capital
B) Internal rate of return
C) Composite discount rates
D) Discounted cashflows
E) Net present value
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Chapter 15: Equity Portfolio Management Stragtegies
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Sample Questions
Q1) Which of the following statements regarding momentum strategies is <b>true</b>?
A) Price momentum is a fundamental strategy.
B) Earnings momentum is a technical strategy.
C) Price momentum and earnings momentum strategies will often result in identical portfolio strategies and holdings.
D) The earnings momentum investor will most likely acquire stocks for companies that have positive earnings surprises.
E) All of the above statements are true
Q2) In ____ strategy,certain economic sectors or industries are overweighted relative to the benchmark in anticipation of the next phase of the business cycle.
A) Sector rotation
B) Price momentum
C) Earnings momentum
D) Return rotation
E) None of the above
Q3) Growth stocks consistently outperform value stocks.
A)True
B)False
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17
Chapter 16: Technical Analysis
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Q1) Refer to Exhibit 16.2.Calculate the net advance-decline for day 5.
A) -3,883
B) 9,540
C) -2,354
D) 13,356
E) 7,953
Q2) If a technical trading rule is successful,more traders use it,causing the rule to become even more successful.
A)True
B)False
Q3) For technical trading rules to generate returns that are superior to a buy-and-hold strategy,net of transaction costs,the market would have to be
A) Rising.
B) Falling.
C) Inefficient.
D) Overvalued.
E) Undervalued.
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Chapter 17: Bond Fundamentals
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Q1) Government bond issues require an annual sinking fund payment of not less than one percent of the outstanding issue.
A)True
B)False
Q2) High-yield bonds are considered "investment" grade.
A)True
B)False
Q3) Refer to Exhibit 17.2.If market interest rates rise to 10%,what will the price of the XLR Corporate bond be in three years?
A) $832.89
B) $838.07
C) $1097.63
D) $1,102.85
E) $1,191.43
Q4) The following are participating issuers in bond markets:
A) Governments.
B) School districts.
C) Corporations
D) a and c.
E) a, b and c.
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Chapter 18: The Analysis and Valuation of Bonds
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Q1) An interest rate is the price of loanable funds.
A)True
B)False
Q2) Consider a bond with a price of $944.44 and a coupon of 8 1/2%.What is the current yield?
A) 9.4%
B) 6.8%
C) 8.6%
D) 9.0%
E) 11.0%
Q3) Suppose you have a 15%,25 year bond traded at $975.If it is callable in 5 years at $1050,what is the bond's yield to call? Interest is paid annually.
A) 15%
B) 16.5%
C) 7.65%
D) 8.52%
E) 9.64%
Q4) The lower a bond's yield to maturity,the greater its duration.
A)True
B)False
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Chapter 19: Bond Portfolio Management Strategies
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Q1) In classical immunization the effect of a change in interest rates is effectively neutralized because
A) Price risk and reinvestment risk offset each other.
B) Price risk and maturity risk offset each other.
C) Reinvestment risk and credit risk offset each other.
D) Reinvestment risk and maturity risk offset each other.
E) None of the above.
Q2) When applying active management techniques to a global portfolio the additional concern is expectations regarding exchange rates between countries.
A)True
B)False
Q3) The components of interest rate risk are: price risk and maturity risk.
A)True
B)False
Q4) In a ladder strategy,funds are invested equally among a wide range of maturities. A)True
B)False
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Chapter 20: An Introduction to Derivative Markets and Securities
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Q1) The minimum value of an option is zero.
A)True
B)False
Q2) You own a stock that has risen from $10 per share to $32 per share.You wish to delay taking the profit but you are troubled about the short run behavior of the stock market.An effective action on your part would be to
A) Buy a put option on the stock.
B) Write a call option on the stock.
C) Purchase an index option.
D) Utilize a bearish spread.
E) Utilize a bullish spread.
Q3) A stock currently trades at $110.June call options on the stock with a strike price of $120 are priced at $5.75.Calculate the dollar return on one call contract.
A) -$1000
B) $1000
C) $575
D) -$575
E) $0
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Chapter 21: Forward and Futures Contracts
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Q1) Refer to Exhibit 21.8.Calculate the overall profit.
A) $1,550,000
B) -$2,000,000
C) $2,050,000
D) -$5,000,000
E) $2,400,000
Q2) Refer to Exhibit 21.3.If 90-day LIBOR rises to the levels "predicted" by the implied forward rates,what will the dollar level of the bank's interest receipt be at the end of the third quarter?
A) $35,250.00
B) $36,375.00
C) $38,250.00
D) $41,005.50
E) None of the above
Q3) Refer to Exhibit 21.2.How you would go about hedging the bond issue?
A) Buy 5,000 contracts
B) Buy 50,000 contracts
C) Sell 5,000,000 contracts
D) Sell 5,000 contracts
E) None of the above
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Chapter 22: Option Contracts
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Q1) A strip is a call option on a stock that is written by someone that owns the stock.
A)True
B)False
Q2) Index options are settled by delivery of the stocks that make up the index.
A)True
B)False
Q3) Refer to Exhibit 22.5.Calculate the possible prices of the stock one year from today.
A) $37.50 or $17.50.
B) $62.50 or $37.50.
C) $62.50 or $17.50.
D) $50 or $45.
E) None of the above.
Q4) The value of a call option is inversely related to:
A) Underlying stock price.
B) Time to expiration
C) Exercise price.
D) a and b
E) b and c
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Chapter 23: Swap Contracts,convertible Securities,and
Other Embedded Derivatives
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Q1) Refer to Exhibit 23.4.Describe the transaction that occurs between PU and the swap dealer if the monthly average oil futures settlement price is $58.45.
A) PU pays the swap dealer $725,000.
B) The swap dealer pays PU $725,000.
C) PU pays the swap dealer $475,000.
D) The swap dealer pays PU $475,000.
E) None of the above.
Q2) A ____ contract can be viewed as a prepackaged series of forward rate agreements to buy or sell LIBOR at the same fixed rate.
A) Swap
B) Cap
C) Floor
D) Collar
E) None of the above
Q3) In an interest rate swap,the fixed rate payer profits if interest rates fall.
A)True
B)False
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Assets, and Industry Ethics
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Q1) Consider X Bond Fund which consists of the 5 bonds shown below with no liabilities. \(\begin{array}{lcc}
\text { Company } & \text { Current Bond Value } & \text { \# Bonds } \\
\hline \text { Komko } & 980 & 120 \\
\text { Hijack } & 1010 & 150 \\
\text { Mitsue } & 1200 & 100 \\
\text { Smitsu } & 800 & 120 \\
\text { Innes } & 600 & 150
\end{array}\)
If initially the value of the fund was $1,000,000 and the original shares were offered to the public with a NAV of $25 per share,what is the current NAV of the fund?
A) $25.00
B) $27.68
C) $25.68
D) $28.76
E) $26.78
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Chapter 25: Evaluation of Portfolio Performance
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Q1) Refer to Exhibit 25.9.Calculate the Jensen alpha Measure for each portfolio.
A) A1 = 0.014, A2 = -0.002, A3 = 0.002, A4 = -0.02
B) A1 = 0.002, A2 = -0.02, A3 = 0.002, A4 = -0.014
C) A1 = 0.02, A2 = -0.002, A3 = 0.002, A4 = -0.014
D) A1 = 0.02, A2 = -0.002, A3 = 0.02, A4 = -0.14
E) None of the above
Q2) A portfolio's gross selectivity is made up of A) Manager's risk.
B) Net selectivity.
C) Diversification.
D) a and b.
E) b and c.
Q3) Refer to Exhibit 25.11.Based on the Sharpe Measure which portfolio preformed best?
A) A
B) B
C) C
D) D
E) Market
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Chapter 26: Investment Return and Risk Analysis Questions
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Q1) Refer to Exhibit 1A.2.The standard deviation for project X is
A) -1.581 percent
B) 0.000 percent
C) 1.581 percent
D) 2.738 percent
E) 5.000 percent
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
Q3) Refer to Exhibit 1A.1.The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
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Chapter 27: Investment and Retirement Plans
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Q1) The retirement plan that promises to pay a specific benefit to its beneficiaries is
A) A defined contribution plan.
B) A defined benefit pension plan.
C) A non-contribution pension plan.
D) An actuarial pension plan.
E) Supplemental Retirement Account (SRA).
Q2) Banks must compete for funds (savings deposits,CD's,etc.)in order to make loans and other types of investments.
A)True
B)False
Q3) Cash flows for nonlife insurance companies,such as property and casualty,are similar to cash flows of life insurance companies.
A)True
B)False
Q4) Banks have high liquidity needs and therefore,have a short time horizon. A)True
B)False
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Chapter 28: Calculating Covariance and Correlation
Coefficient of Assets
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Q1) Refer to Exhibit 3A.1.Calculate the coefficient of correlation.
A) -0.456
B) -0.354
C) 0.000
D) 0.456
E) 3.538
Q2) Refer to Exhibit 3A.1.Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
Q3) 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
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Chapter 29: Portfolio Variance and Stock Weight
Calculations
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Q1) Refer to Exhibit 7A.1.Show the minimum portfolio variance for a two stock portfolio when r<sub>1.2</sub> = 1.
A) E(?<sub>2</sub>) ¸ [E(?<sub>1</sub>) - E(?<sub>2</sub>)]
B) E(?<sub>2</sub>) ¸ [E(?<sub>1</sub>) + E(?<sub>2</sub>)]
C) E(?<sub>1</sub>) ¸ [E(?<sub>1</sub>) - E(?<sub>2</sub>)]
D) E(?<sub>1</sub>) ¸ [E(?<sub>1</sub>) + E(?<sub>2</sub>)]
E) None of the above
Q2) Refer to Exhibit 7A.1.What weight of security 1 gives the minimum portfolio variance when r<sub>1.2 </sub>= .60,E(?<sub>1</sub>)= .10 and E(?<sub>2</sub>)= .16?
A) .0244
B) .3679
C) .5697
D) .6309
E) .9756
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Chapter 30: Portfolio Optimization with Negative
Correlation: Finding Minimum Variance and Weight
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Sample Questions
Q1) Refer to Exhibit 7B.1.What is the value of W when r . = -1 and E(s )= .10 and E(s )= .12?
A) 45.46%
B) 50.00%
C) 59.45%
D) 54.55%
E) 74.55%
Q2) Refer to Exhibit 7B.1.Show the minimum portfolio variance for a portfolio of two risky assets when r . = -1.
A) E( 1) ¸ [E( 1) + E( 2)]
B) E( 1) ¸ [E( 1) - E( 2)]
C) E( 2) ¸ [E( 1) + E( 2)]
D) E( 2) ¸ [E( 1) - E( 2)]
E) None of the above
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