Wealth Management
Final Exam Questions
Course Introduction
Wealth Management is a comprehensive course designed to introduce students to the principles and practices of managing individual and institutional wealth. The course covers essential topics such as investment strategies, asset allocation, risk management, retirement and estate planning, tax implications, and behavioral finance. Students will explore case studies and real-world scenarios to understand how financial advisors help clients achieve their financial goals. By the end of the course, students will have a solid foundation in assessing investment opportunities, constructing diversified portfolios, and utilizing financial tools to preserve and grow wealth over time.
Recommended Textbook Investment Analysis and Portfolio Management 11th Edition by Frank K. Reilly
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22 Chapters
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2045 Flashcards
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Page 2
Chapter 1: The Investment Setting
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Sample Questions
Q1) The ____ the variance of returns, everything else remaining constant, the ____ the dispersion of expectations and the ____ the risk.
A) larger, greater, lower
B) larger, smaller, higher
C) larger, greater, higher
D) smaller, greater, lower
E) smaller, greater, greater
Answer: C
Q2) The rate of exchange between future consumption and current consumption is the A) nominal risk-free rate.
B) coefficient of investment exchange.
C) pure rate of interest.
D) consumption/investment paradigm.
E) expected rate of return.
Answer: C
Q3) The risk premium is a function of the volatility of operating earnings, sales volatility, and inflation.
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.1. The expected return from this investment is A) -0.0752.
B) -0.0040.
C) 0.00.
D) 0.0075.
E) 0.4545.
Answer: D
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) Equity allocations of pension funds in Japan and Germany are similar to those in the United States.
A)True
B)False
Answer: False
Q2) The policy statement may include a ____ against which a portfolio's or portfolio manager's performance can be measured.
A) milestone
B) benchmark
C) landmark
D) reference point
E) market pair
Answer: B
Q3) The portfolio mixes of institutional investors around the world are approximately the same.
A)True
B)False
Answer: False
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Page 5
Chapter 2: Asset Allocation and Security Selection: Part A
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Sample Questions
Q1) 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
Q2) 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
Q3) Refer to Exhibit 2A.1. Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
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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) A block trade is one which involves a minimum of
A) 1,000 shares.
B) 5,000 shares.
C) 10,000 shares.
D) 100,000 shares.
E) 1,000,000 shares.
Q3) Rule 415 allows corporations to place securities privately with large, sophisticated institutional investors without extensive registration documents.
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 4: Security Market Indexes and Index Funds
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Sample Questions
Q1) The Standard & Poor's International Index consists of three international, 19 national, and 38 international industry indexes.
A)True
B)False
Q2) The Dow Jones Industrial Average is a value weighted average.
A)True
B)False
Q3) The NYSE series should have higher rates of return and risk measures than the AMEX and OTC series.
A)True
B)False
Q4) Refer to Exhibit 4.3. Calculate the average annual rate of change for GB Industries for the five-year period using the geometric mean.
A) 9.7800%
B) 0.0978%
C) 9.0700%
D) 0.0970%
E) 3.6400%
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Chapter 5: Efficient Capital Markets, Behavioral Finance, and Technical Analysis
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Sample Questions
Q1) According to the weak-form efficient market hypothesis, which of the following types of information are fully reflected in stock prices?
A) rates of return, trading volume, and news about the economy
B) dividend and earnings announcements
C) rates of return, trading volume, and block trades
D) earnings announcements and rates of return
E) insider information
Q2) The weak form of the efficient market hypothesis contends that stock prices fully reflect all public and private information.
A)True
B)False
Q3) Two major classes of technicians include the contrarians and those who "follow the smart money"
A)True
B)False
Q4) The majority of technicians follow many trading rules and attempt to arrive at a consensus among their rules.
A)True
B)False
Page 9
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) As the number of securities in a portfolio increases, the amount of systematic risk A) remains constant.
B) decreases.
C) increases.
D) changes.
E) resets to zero.
Q2) Prior to the work of Markowitz in the late 1950's and early 1960's, portfolio managers did NOT have a well-developed, quantitative means of measuring risk.
A)True
B)False
Q3) Risk is defined as the uncertainty of future outcomes.
A)True
B)False
Q4) A basic assumption of the Markowitz model is that investors base decisions solely on expected return and risk.
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) A friend has some reliable information that the stock of Puddles Company is going to rise from $43.00 to $50.00 per share over the next year. You know that the annual return on the S&P 500 has been 11 percent and the 90-day T-bill rate has been yielding 5 percent per year over the past 10 years. If beta for Puddles is 1.5, will you purchase the stock?
A) Yes, because it is overvalued.
B) Yes, because it is undervalued.
C) No, because it is undervalued.
D) No, because it is overvalued.
E) Yes, because the expected return equals the estimated return.
Q2) Refer to Exhibit 7.9. The expected returns for stock X, stock Y, and stock Z are
A) 3 percent, 8 percent, 10 percent
B) 7.1 percent, 10.5 percent, 8.8 percent
C) 7.1 percent, 8.8 percent, 10.5 percent
D) 10 percent, 5.5 percent, 14 percent
E) 14 percent, 5.5 percent, 12 percent
Q3) The APT assumes that security returns are normally distributed.
A)True
B)False
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Page 13
Chapter 8: Equity Valuation
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Sample Questions
Q1) Which of the following is NOT considered a basic economic force?
A) fiscal policy
B) monetary policy
C) inflation
D) P/E ratio
E) All of these are basic economic forces.
Q2) Refer to Exhibit 8.3. The future price of the stock in year 5 is
A) $113.40.
B) $122.47.
C) $132.27.
D) $142.85.
E) $154.35.
Q3) Operating margins are defined as Operating Profit/Sales
A)True
B)False
Q4) If the intrinsic value of an asset is greater than the market price, you would want to buy the investment.
A)True
B)False
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Chapter 9: The Top-Down Approach to Market, Industry, and Company Analysis
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Sample Questions
Q1) Which of the following is a market tenet of Warren Buffett?
A) long-term prospects
B) resistance to institutional imperative
C) creation of one dollar of market value for every dollar retained
D) purchase at discount to intrinsic value
E) Product is not faddish.
Q2) Refer to Exhibit 9.1. What is your expectation of the market P/E ratio?
A) 8.33
B) 5.33
C) 9.03
D) 6.02
E) 3.24
Q3) Compute the current earnings multiple if the dividend payout ratio for the aggregate market is 60 percent, the required rate of return is 11 percent, and the dividend growth rate is 8 percent.
A) 15
B) 20
C) 25
D) 30
E) 35
Page 15
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Chapter 10: The Practice of Fundamental Investing
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Sample Questions
Q1) Capital allocation is the description of how management uses resources to create value on behalf of shareholders.
A)True
B)False
Q2) In a _____, the issuing company could agree to sell the shares at a price below the clearing price.
A) bookbuilt offering
B) discount offering
C) dirty auction
D) clean auction
E) green shoe
Q3) A company is going public with an offering price of $10 per share. The gross spread is 7 percent. How much will the bank receive? How much will the issuing firm receive?
A) $1.07; $17.00
B) $1.70; $7.00
C) $0.70; $9.30
D) $7.00; $10.00
E) $7.00; $3.00
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Chapter 11: Equity Portfolio Management Strategies
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Sample Questions
Q1) Which of the following is considered a strategy for timing the market and adding value to actively managed portfolios?
A) timing the markets by shifting between different types of securities based on market forecasts and estimated risk premiums.
B) shifting funds between the various equity sectors, industries, investment styles, etc., in order to take advantage of the "hot" concept before the remainder of the market does.
C) individual stock picking in order to buy low and sell high.
D) using tactical asset allocation strategies.
E) All of these are correct.
Q2) Which of the following statements about investment style is FALSE?
A) Growth stocks generally have smaller capitalizations than value stocks.
B) Value stocks have P/E and P/B ratios significantly lower than those of growth stocks.
C) Value stocks dividend yields are much higher than those of growth stocks.
D) Growth and levels of earnings is higher in growth stocks.
E) Value stocks have a higher risk premium.
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Chapter 12: Bond Fundamentals and Valuation
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Sample Questions
Q1) According to the expectations hypothesis, a rising yield curve indicates that investors expect
A) future short-term rates to fall.
B) future short-term rates to rise.
C) future long-term rates to rise.
D) future long-term rates to fall.
E) None of these are correct.
Q2) The promised yield to maturity calculation assumes that
A) all coupon interest payments are reinvested at the current market interest rate for the bond.
B) all coupon interest payments are reinvested at the coupon interest rate for the bond.
C) all coupon interest payments are reinvested at short-term money market interest rates.
D) all coupon interest payments are not reinvested.
E) None of these are correct.
Q3) High-yield bonds are considered "investment" grade.
A)True
B)False
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Chapter 13: Bond Analysis and Portfolio Management Strategies
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Sample Questions
Q1) Refer to Exhibit 13.5. The realized compound yield on the current bond is
A) 15.50%.
B) 11.03%.
C) 10.30%.
D) 8.01%.
E) 9.00%.
Q2) Refer to Exhibit 13.3. Calculate the current price of the bond.
A) $964.90
B) $965.35
C) $981.41
D) $1035.45
E) $1035.85
Q3) Refer to Exhibit 13.2. What is the price of the Talmart corporate bonds?
A) $965.63
B) $966.13
C) $1,034.65
D) $1,135.10
E) $1,051.97
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Chapter 14: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) The initial value of a future contract is the price agreed upon in the contract.
A)True
B)False
Q2) The CBOE brought numerous innovations to the option market. Which of the following is NOT such an innovation?
A) creation of a central marketplace
B) creation of a non-liquid secondary option market
C) introduction of a Clearing Corporation
D) standardization of all expiration dates
E) standardization of all exercise prices
Q3) The value of a call option just prior to expiration is (where V is the underlying asset's market price and X is the option's exercise price)
A) max [0, V - X].
B) max [0, X - V].
C) min [0, V - X].
D) min [0, X - V].
E) max [0, V > X].
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Page 20
Chapter 15: Forward, Futures, and Swap Contracts
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Sample Questions
Q1) Refer to Exhibit 15.9. Calculate the price of the futures contract now.
A) 1108.59
B) 1102.75
C) 1139.79
D) 1123.19
E) 1350.15
Q2) The goal of a hedge transaction is to increase expected returns of a fundamental holding.
A)True
B)False
Q3) Refer to Exhibit 15.3. What is the implied 90-day forward rate at the beginning of the fourth quarter?
A) 6.19%
B) 5.10%
C) 6.07%
D) 5.68%
E) 0%
Q4) The basis is the spot price minus the future price. A)True
B)False
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Chapter 16: Option Contracts
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Sample Questions
Q1) The standardization of option contracts and the creation of the Options Clearing Corporation are two important results of the opening of the Chicago Board of Options Exchange.
A)True
B)False
Q2) Refer to Exhibit 16.3. Calculate the price of the put option.
A) $1.086
B) $0.862
C) $6.234
D) $0.623
E) $2.317
Q3) Refer to Exhibit 16.7. Calculate the payoff of a short straddle at an expiration stock price of $20.
A) -$4.50
B) -$2.00
C) $2.00
D) $4.50
E) $20.50
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22
Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) Open-end mutual funds that charge a sales fee when the fund is initially offered to the investor are known as
A) 12b-1.
B) americus trusts.
C) unit investment trusts.
D) load funds.
E) contingency funds.
Q2) The market price of shares of a closed-end fund is typically determined by supply and demand.
A)True
B)False
Q3) Hedge funds have no limitations on when and how often capital can be contributed or removed from the partnership.
A)True
B)False
Q4) Convertible arbitrage hedge funds profit from disparities in the relationship between prices for convertible bonds and fixed-income bonds.
A)True
B)False
Page 23
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) The Sharpe measure of portfolio performance divides the portfolio's risk premium by the portfolio's beta.
A)True
B)False
Q2) Refer to Exhibit 18.9. Calculate CI's selectivity.
A) 0.1225
B) 0.1000
C) 0.0525
D) 0.0475
E) 0.0325
Q3) Refer to Exhibit 18.8. Compute the Jensen Measure for the C fund.
A) 0.16 percent
B) 1.80 percent
C) 7.20 percent
D) 9.00 percent
E) 9.13 percent
Q4) According to Global Investment Performance Standards (GIPS), time-weighted rates of return must be used.
A)True
B)False
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