S65 U21

Question: What is Asset Allocation and its main classes?

Answer: Asset allocation is spreading funds among asset classes based on the IPS. The mix (e.g., stocks, bonds, cash) is considered the primary factor for performance, not individual stock picking.

Question: What are the 5 steps of the Asset Allocation Process?

Answer: 1. Determine objectives and constraints. 2. Create the Investment Policy Statement (IPS). 3. Determine the asset allocation. 4. Allocate capital. 5. Monitor and evaluate investments.

Question: What is the primary purpose of Portfolio Diversification?

Answer: Diversification (investing in an array of separate, low-correlated assets) is used to reduce unsystematic risk (like business risk) and dampen overall portfolio volatility. Adding foreign securities helps because they are often not highly correlated with domestic equities.

Question: What are the four main Asset Classes?

Answer: The four main asset classes are: Cash and Cash Equivalents (e.g., T-bills, Money Market Funds); Fixed-Income Investments (Bonds); Equities (Stocks/Stock Funds); and Hard Assets (Real Estate, Precious Metals).

Question: How do different asset classes hedge risk?

Answer: Diversifying across classes helps reduce overall risk. Fixed-income is generally a hedge against deflation. Equities are generally a hedge against inflation. Staggering bond maturities minimizes interest rate risk.

Question: Diversification vs. Asset Allocation?

Answer: Asset Allocation is the decision to spread resources among different asset classes (e.g., 60% stocks, 40% bonds). Diversification is spreading investments within an asset class (e.g., buying 12 different stocks in varied industries).

A portfolio manager of an asset allocation fund would be least likely to invest in

raw land.

Professional investment managers believe that a well-diversified portfolio offers protection from which of the following risks?

Business risk

Question: What is Tactical Asset Allocation (Active)?

Answer: Tactical (tACTical) is an active management style involving short-term adjustments to the asset mix to capitalize on current market conditions (Market Timing or Sector Rotation). It generates higher transaction (commission) costs.

Question: What is Strategic Asset Allocation (Passive)?

Answer: Strategic is a passive, long-term strategy that creates a portfolio mix (e.g., 60% stock / 40% bond) based on objectives, then rebalances periodically (e.g., annually) to maintain those proportions. Index funds are often used.

Question: What is Rebalancing in a Strategic (Passive) portfolio?

Answer: Rebalancing is the process of periodically selling overperforming assets and buying underperforming assets to return the portfolio to its original strategic (passive) asset allocation mix. This forces "selling high" and "buying low."

Which of the following statements is correct regarding a portfolio manager employing a tactical style?

The commission expense will likely be higher than one employing a passive style.

A senior client's IRA $500,000 portfolio is 30/70 equity/debt mix. Six months later, the portfolio balance is $520,000, of which $170,000 is equity. If the investment adviser recommends semiannual rebalancing, the client will

sell $14,000 of the equity and use the proceeds to purchase $14,000 of debt.

Question: Fundamental vs. Technical Analysis?

Answer: Fundamental Analysis evaluates a company's business, finances, and management (like a full physical exam) to determine its intrinsic value. Technical Analysis predicts near-term prices by charting price, volume, and trends (supply and demand), ignoring the company's financial health.

Question: What are the Dividend Discount and Dividend Growth Models?

Answer: These are fundamental valuation models. The Discount Model computes stock value as the present value of all future dividends (works best for stable dividends). The Growth Model assumes dividends will grow, resulting in a higher calculated current value.

Question: Technical Analysis Concepts: Support and Resistance?

Answer: Support is the price level where buying pressure increases, causing the stock to "bottom." Resistance is the price level where selling pressure increases, preventing the stock from going higher. A Breakout is when the price penetrates these levels.

Question: Technical Market Theories: Odd-Lot and Short Interest?

Answer: Odd-Lot Theory assumes small investors (odd-lot traders) are usually wrong, so if they are buying, it's a bearish sign. **Short

Question: Describe the Buy and Hold and Indexing management styles.

Answer: Buy and Hold is a passive, low-maintenance strategy with minimal trading, resulting in lower costs and long-term capital gains. Indexing is also passive; the portfolio mirrors a market index (like the S&P 500) to match its performance, leading to low costs and high tax efficiency.

Question: What is the difference between Growth and Value investing?

Answer: Growth Managers seek stocks with high earnings momentum, often buying shares with high P/E ratios and little-to-no dividends. Value Managers seek undervalued securities, often buying stocks with low P/E ratios, high cash reserves, and reasonable dividend yields.

Question: What is a Monte Carlo Simulation (MCS) and its purpose?

Answer: MCS is a stochastic modeling technique that uses thousands of computer-generated simulations to forecast how portfolio returns and other variables (like life expectancy) may vary. It helps advisers visualize the probabilities of outcomes and assess the trade-offs between short-term and long-term risks for retirement planning.

Question: What is the Barbell Strategy for bonds?

Answer: The Barbell strategy involves buying bonds that mature at very short-term and very long-term dates

. This actively managed approach aims to benefit from high long-term yields while providing cash flow (from the short end) for reinvestment if rates rise.

Question: What is the Bullet Strategy for bonds?

Answer: The Bullet strategy involves purchasing bonds at different times such that they will all mature at the same future date (the "target"). This active strategy helps lock in prevailing interest rates as they change over the accumulation period.

Question: What is the Laddering Strategy for bonds?

Answer: The Laddering strategy involves buying bonds all at once that mature sequentially at regular intervals (like steps on a ladder) . As short-term bonds mature, the proceeds are reinvested into new long-term bonds, reducing overall interest rate risk.

An analyst using the dividend discount model is attempting to

estimate the current price of a stock.

A portfolio manager who typically purchases common stock when its market price is below the book value per share is most likely categorized as

a value manager.

Which of the following statements regarding a bond ladder strategy is correct?

A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk.

Question: What is the core goal of Modern Portfolio Theory (MPT)?

Answer: MPT, introduced by Markowitz, aims to maximize returns while minimizing risk in the total portfolio, not just individual assets. It holds that unsystematic risk can be diversified away by combining assets with low or inverse correlation .

Question: What is an Optimal Portfolio (Efficient Frontier)?

Answer: An optimal portfolio lies on the Efficient Frontier. It represents the best trade-off, offering either the most return for a given risk or the least risk for a given return. Risk-averse investors always choose the lowest risk for equal expected return.

Question: What is the Capital Asset Pricing Model (CAPM)?

Answer: CAPM is a pricing model that determines an asset's expected return based only on its systematic risk (non-diversifiable risk, measured by Beta). It assumes higher systematic risk demands a higher expected return.

Question: Key features of the Capital Market Line (CML)?

Answer: The CML is an offshoot of CAPM that measures a portfolio's expected return based on its total risk. Unlike other CAPM metrics, the CML uses Standard Deviation (not Beta or Alpha) as its measure of risk.

Question: What is the Security Market Line (SML) and what risk does it measure?

Answer: The SML evaluates individual securities based on systematic risk (measured by Beta) to determine an asset's expected return. It is derived from the Capital Asset Pricing Model (CAPM) and assumes unsystematic risk has been diversified away.

Question: How do you calculate the Expected Return using the SML formula?

Answer: Expected Return = ([Return of the Market - Risk-Free Rate] × Beta) + Risk-Free Rate. This formula determines the appropriate return for taking on the security's level of systematic risk.

Question: SML vs. CML: Which risk measure is used?

Answer: The Security Market Line (SML) measures risk using Beta (systematic risk only). The Capital Market Line (CML) measures risk using Standard Deviation (total risk) and is used for diversified portfolios.

Question: What is the Efficient Market Hypothesis (EMH)?

Answer: The EMH (or random walk theory) holds that security prices quickly reflect all available information. Therefore, it is impossible for investors to consistently achieve abnormal returns, suggesting a passive investment strategy is most suitable.

Question: What is the Weak Form of EMH?

Answer: The Weak Form states that prices reflect all historical market data. Therefore, Technical Analysis is useless, but Fundamental Analysis and Insider Information could still produce superior returns.

Question: What is the Semi-Strong Form of EMH?

Answer: The Semi-Strong Form states that prices reflect all publicly available information (historical data, financial statements, etc.). Both Technical and Fundamental Analysis are useless; only Insider Information might help.

Question: What is the Strong Form of EMH?

Answer: The Strong Form states that prices reflect all information—public and private (insider). Under this form, no one can consistently achieve superior returns, and the random walk prevails.

The capital asset pricing model (CAPM) is a securities market investment theory allowing the investor to determine an asset's expected rate of return, a form of risk-adjusted return encapsulating how much risk the investor should assume to obtain a particular return from an investment. The theory includes a number of assumptions. Which of the following is not one of those assumptions?

There are no transaction costs or personal income taxes other than those on capital gains.

If the beta of KMS Company is 0.7 and the market return is expected to be 20% with a risk-free return of 2%, then, using the SML, the expected return of KMS is

14.6%.

Which form of the efficient market hypothesis (EMH) states that excess returns cannot be obtained using technical analysis?

Weak form

Question: What is Dollar Cost Averaging (DCA)?

Answer: DCA is an investment strategy where a consistent amount of money is invested in a security (like a mutual fund) at regular intervals. This approach purchases more shares when prices are low and fewer shares when high, with the purpose of reducing the average cost per share over time.

Question: What is the main benefit and risk reduced by DCA?

Answer: The main benefit is that, in a fluctuating market, the average cost per share will be lower than the average price per share. DCA is used to reduce timing risk —the risk of investing a lump sum at the market's peak.

Question: Strategy to Protect Long Stock Position from decline?

Answer: Buy a Protective Put (Long Stock + Long Put). This strategy provides portfolio insurance, giving the right to sell the stock at the strike price if the market falls. The cost is the premium paid, but potential upside remains unlimited (minus the premium).

Question: Strategy to Generate Income and reduce risk on Long Stock?

Answer: Write a Covered Call (Long Stock + Short Call). The premium received provides partial protection against loss and generates income. However, the potential gain is limited because the stock must be sold at the call's strike price if the option is exercised.

Question: Strategy to Protect Short Stock Position from price rise?

Answer: Buy a Call Option on the stock (Short Stock + Long Call). A short seller must buy to cover; the long call gives them the right to buy the stock at the strike price, establishing a maximum loss rather than the unlimited loss typical of an unhedged short position.

An investor has set up an automatic bank draft to purchase $200 of the KAPCO Balanced Fund every month. Over the past five months, per share prices when the purchases were executed were $10.00, $12.00, $15.00, $14.00, and $11.00. Using this dollar-cost averaging program resulted in an average cost per share of

$12.13.

An investor owns 100 shares of Lockstone Pipeline Incorporated (LPI) and is concerned that the stock's price has downside volatility. Without a cash outlay, this investor could partially hedge the position by

selling an LPI call.

Although most investors are buying common stock issued by LMN corporation, Jack is selling it short. In this action, Jack appears to be

a contrarian

When building an investment portfolio, it is generally recommended that an asset allocation process be used to increase the portfolio diversification and reduce risk. Which of the following is least likely to be considered an asset class?

Mutual funds

Which investment strategy is consistent with a belief in the efficient market hypothesis?

Selecting a random set of stocks for a portfolio

If a technician believed in the importance of volume, which of the following would indicate bullish sentiment?

Prices increase on heavy volume.

An analytical tool used to project the current value of a common stock using projected future dividends is

the dividend discount model

A well-diversified investor following a rebalancing portfolio strategy in a rising market will most likely

sell part of the stock in the portfolio

Hexagon Portfolio Advisors (HPA) believes that the market is semi-strong efficient. The firm's portfolio managers most likely will use

passive portfolio management strategies.

The portfolio of a client of an investment adviser began the year with a market value of $1.2 million. Sixty percent of the portfolio was in equities, thirty percent in bonds, and the remainder in cash. It was a good year for equities and, at the end of the year, the total value of the account was $1.5 million. This resulted in the portfolio manager liquidating approximately $100,000 of stock and placing the money into bonds. Given this information, it is most likely that this manager's investment style is

strategic asset management.

Which of the following is not an assumption of the capital market theory?

All market participants borrow and lend at different risk-free rates.

Market timing is normally associated with which of the following portfolio management styles?

Tactical asset allocation

Two of the major factors involved in the capital asset pricing model (CAPM) are

1. interest rates

2. stock risk premium

3. tax rates

4. market risk premium

II and IV

An investor is short stock at 60. The current market price of the stock is 35, and he anticipates it will continue to decline. If he thinks the price will rise temporarily and if he does not wish to close out his short position, his best strategy to prevent a loss would be to

buy an XYZ 35 call

Which of the following forms of the efficient market hypothesis claims that technical analysis works?

None of these

Which of the following would an investor who believes in MPT probably select for a client?

JKL, with a return of 15% and a standard deviation of 15

A client wishing to hedge a long stock position would be most likely to:

buy a put on that stock.

Wrap fee accounts would tend to be most suitable for investors who follow

a tactical approach to investing

One method used by some analysts to estimate the future value of a stock is the dividend growth model. This model would probably be most useful in the case of

a large-cap stock

Although most investors are buying common stock issued by LMN corporation, Jack is selling it short. In this action, Jack appears to be

a contrarian

Question 1 of 32

Question ID: 1585491

If an investor practices value investing, which of the following stock types is the investor least likely to purchase?

A stock with an above-average price-to-earnings ratio

Question 2 of 32

Question ID: 1756832

Investment advisers who do not believe they can time the market, or pick those securities that will outperform their benchmarks, would have which of the following as the most important portfolio consideration?

Minimizing investment expense while maintaining proper asset allocation

Question 3 of 32

Question ID: 1585503

An investor does not wish to attempt to time the market, so she invests $300 each month into the GEMCO Growth Fund. Over the past five months, her purchase prices have been $10, $12, $15, $20, and $25. On the basis of this information, if she were to stop investing at this point and sell her shares two months from now when the net asset value (NAV) is $15 per share and the public offering price is $15.79, it would be correct to state that her

B)

cost basis for tax purposes was $14.71.

Question 4 of 32

Question ID: 1526658

Diversifying a portfolio could be expected to provide all of the following benefits except

reducing transaction costs.

Question 5 of 32

Question ID: 1585485

One of the asset allocation classes is fixed income securities. When an investment adviser representative is determining which securities should fill that portion of the client's portfolio, which of the following would not be included?

Preferred stock

Question 6 of 32

Question ID: 1585490

An analyst using the dividend growth model would take into account all of the following factors except

A)

the current earnings per share.

Question 7 of 32

Question ID: 1526666

Proponents of which of the following technical theories assume that small investors are usually wrong?

Odd lot

Question 8 of 32

Question ID: 1585488

Sector rotation would most likely be employed by an investment adviser using which of the following investment styles?

Tactical

Question 9 of 32

Question ID: 1585486

All of the following are examples of a portfolio diversified through asset allocation except

Daniel’s portfolio, which consists of shares of common stock in 52 different corporations.

Question 10 of 32

Question ID: 1585497

An optimal portfolio is one that

C)

lies on the efficient frontier.

Question 11 of 32

Question ID: 1585487

In contrast to the strategic approach, tactical asset allocation

continuously adjusts the asset allocation and class mix in an attempt to take advantage of changing market conditions.

Question 12 of 32

Question ID: 1585500

One popular method used to predict the expected return of a stock is the capital asset pricing model (CAPM). Analysts using CAPM rely on all of these except

the standard deviation of the stock.

Question 13 of 32

Question ID: 1585495

Which of the following bond strategies is the least active?

C)

Bullet

Question 14 of 32

Question ID: 1585494

Your client's child is entering college next year. Which of the following would be the most appropriate recommendation?

B)

A five-year laddered portfolio of U.S. Treasury notes

Question 15 of 32

Question ID: 1614286

An investment adviser is doing some research on a company and notices that the current market price is $21 per share. The most recently reported earnings per share is $3, and the company is paying a $0.26 quarterly dividend. On the balance sheet, the company is carrying a significant amount of cash. This company would probably be attractive to this adviser if his investment style was

B)

value.

Question 16 of 32

Question ID: 1585496

An investment adviser (IA) explaining modern portfolio theory (MPT) to a client might make all of the following statements except

if one security has a higher return than another and at the same time has a higher risk, choose it.

Question 17 of 32

Question ID: 1526684

The use of futures to hedge against a price increase is best referred to as

a long hedge.

Question 18 of 32

Question ID: 1585507

An investor is long 100 shares of XUZ common stock. If the investor wishes to generate some additional income while also creating a partial hedge, the recommended strategy would be to

B)

go short an XUZ call.

Question 19 of 32

Question ID: 1585489

The dividend discount model is

an analytical tool used to value a common stock using the present value of future dividends.

Question 20 of 32

Question ID: 1526671

Which of the following statements regarding a bond ladder strategy is correct?

B)

A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk.

Question 21 of 32

Question ID: 1585504

Customer A and Customer B each have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments?

1. Receiving cash distributions may reduce Customer A's proportional interest in the fund.

2. Customer A may use the cash distributions to purchase shares later at NAV.

3. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price.

4. Due to compounding, Customer B's principal will be at greater risk.

I and III

Question 22 of 32

Question ID: 1585492

Which of the following describes an investment management style?

D)

Large capitalization

Question 23 of 32

Question ID: 1585498

One of the offshoots of the capital asset pricing model (CAPM) is the capital market line (CML). The equation for the CML uses which of the following?

Standard deviation

Question 24 of 32

Question ID: 1676360

According to the efficient market hypothesis, information found when reading The Wall Street Journal would be considered

D)

weak form market efficiency.

Question 25 of 32

Question ID: 1585484

Which of the following are asset classes?

A)

REITs

Question 26 of 32

Question ID: 1585505

A mutual fund investor is using a dollar cost averaging strategy. For the average price per share to exceed the investor's average cost, which of the following conditions must be present?

1. The market price per share fluctuates with each purchase.

2. A fixed dollar amount is invested at regular intervals.

3. A fixed number of shares is purchased monthly.

4. A constant dollar value is maintained in the account.

I and II

Question 27 of 32

Question ID: 1526679

An individual who is a proponent of the efficient market hypothesis (EMH) will likely invest in which of the following?

Index funds

Question 28 of 32

Question ID: 1585499

If the expected return on the market is 20% and the risk-free rate is 4%, a stock with a beta coefficient of 0.8 would have an expected rate of return under CAPM of

16.8%.

Question 29 of 32

Question ID: 1526660

As a technique in portfolio management, portfolio diversification reduces

unsystematic risk.

Question 30 of 32

Question ID: 1585502

A securities analyst does not believe that markets are highly efficient. This analyst most likely follows which of the following investing strategies?

Tactical

Question 31 of 32

Question ID: 1526655

Published studies have shown that much of the performance of a portfolio can be attributed to which of the following factors?

Asset allocation

Question 32 of 32

Question ID: 1585506

Your client owns 500 shares of RMBN purchased at $11.94 per share. The stock is now selling for $12.70 per share, and the client is concerned that the market may turn downward. You could suggest protecting the profit by

buying five RMBN 12.50 puts.

Based on the following information, which stock is most attractive to a value investor?

Book value of $22 per share, current market value of $17 per share

A technical analyst would be least concerned with

book value per share

Question: What is Technical Analysis and its goal?

Answer: A method of predicting short-term (4-6 weeks) stock price trends by analyzing charts of price movements and trading volume. Its goal is to measure market risk and reduce timing risk.