Wealth Management Study Guide Questions
Course Introduction
Wealth Management explores the principles and practices involved in preserving and enhancing the financial assets of individuals and families. The course covers a broad range of topics, including investment strategies, risk assessment, portfolio diversification, retirement planning, estate planning, tax optimization, and the use of trusts and insurance. Students will learn how to assess client needs, develop tailored wealth management plans, and navigate the ethical and regulatory frameworks that govern the industry. Practical case studies and current trends in global markets are also analyzed to equip students with the skills necessary to succeed as wealth management professionals.
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Investments Analysis and Management 13th Edition by Charles P. Jones
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Page 2
Chapter 1: Understanding Investments
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Q1) Gold coins would be classified as:
A)real assets.
B)indirect assets.
C)personal assets.
D)financial assets. Answer: A
Q2) Many Wall Street jobs tend to be cyclical in nature.
A)True
B)False Answer: True
Q3) Security analysts are typically employed only at brokerage houses. A)True
B)False Answer: False
Q4) What are some of the career opportunities in the investment industry?
Answer: Investment banker,merger and acquisition specialist,security traders,sales people,security analyst,portfolio manager,registered investment advisor and financial planner.
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Chapter 2: Investment Alternatives
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Q1) The major bond rating service is Dun & Bradstreet.
A)True
B)False
Answer: False
Q2) Which of the following statements is true regarding asset-backed securities?
A)They offer relatively high yields.
B)They have relatively long maturities.
C)They generally have low credit ratings.
D)Each traunche has the same risk.
Answer: A
Q3) Distinguish between direct and indirect investing.
Answer: Direct investing - buy bonds and stocks;Indirect investing - buy mutual funds,contribute to pension plans,buy life insurance policies.
Q4) What are some advantages of asset-backed securities to investors?
Answer: High yields with manageable risk.
Q5) A corporate investor in the 34% marginal income tax bracket can buy bonds issued by a petroleum exploration company yielding 10.606%.The investor should be willing to buy tax-exempt municipal bonds of similar quality yielding what percent or higher?
Answer: 10.606 x (1.0-0.34)= 7.00 percent
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Chapter 3: Indirect Investing
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Q1) A group of mutual funds with a common management are known as:
A)fund syndicates.
B)fund conglomerates.
C)fund families.
D)fund complexes.
Answer: D
Q2) Is an investor able to achieve significant diversification by purchasing a single-country fund?
Answer: The fund itself might be well diversified within that country if the fund owns a wide variety of securities.However,an investor seeking international diversification would not be well diversified in terms of country risk and exchange-rate risk.
Q3) Total return for a mutual fund includes capital gains less any reinvested dividends.
A)True
B)False
Answer: False
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Chapter 4: Securities Markets and Market Indexes
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Q1) A type of trading involving a basket of 15 stocks or more and often used in conjunction with arbitrage strategies is called:
A)swapping.
B)program trading.
C)day trading.
D)insider trading.
Q2) The price that a dealer offers a stock for sale is known as the: A)the bid quote.
B)the ask quote.
C)the closing price.
D)the specialist price.
Q3) Some OTC stocks are traded through the: A)blue sheets.
B)red sheets.
C)pink sheets
D)green sheets.
Q4) What are the major advantages of a private placement for the issuer of securities?
Q5) What is the difference between a seasoned issue and an IPO?
Q6) The DJIA is a _______-weighted index.
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Chapter 5: How Securities Are Traded
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Q1) What are two methods of investing in stocks without a broker?
Q2) The Securities and Exchange Commission is a division of the Department of Justice. A)True
B)False
Q3) What are some of the functions of the NASD?
Q4) The SIPC limit for insurance coverage on cash is _____________________.
Q5) Raymond James and Edward Jones are examples of:
A)discount brokers.
B)wholesale brokers.
C)full-service brokers.
D)blue-chip brokers.
Q6) The law that requires that all new issues being offered for public sale to be registered with the SEC is the:
A)Securities Act of 1933.
B)Securities Exchange Act of 1934.
C)Maloney Act of 1936.
D)Securities Investor Protection Act of 1970.
Q7) The NYSE regulatory triad consists of:
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Chapter 6: The Risks and Returns From Investing
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Q1) Return and risk are inversely related.
A)True
B)False
Q2) The standard deviation of returns,calculated as the square root of the variance of returns,is a measure of total risk of an asset or portfolio.
A)True
B)False
Q3) What was the effect on foreign investors owning U.S.stocks when the dollar fell in 2008?
Q4) If you invest in German bonds and the Euro becomes stronger during your holding period,then:
A)you will be able to buy back fewer dollars when you redeem your bond.
B)your dollar-denominated return will increase.
C)your-dollar denominated return will decrease.
D)your return will be the interest you receive.
Q5) What common variable is used in the calculation of both the cumulative wealth index and the geometric mean return?How is the common variable calculated?How is it used in each?
Q6) What is the best measure of risk for a sole proprietorship?
Page 8
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Chapter 7: Portfolio Theory
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Q1) The correlation coefficient identifies what causes the relative movement in returns between two securities.
A)True
B)False
Q2) The expected value is the:
A)inverse of the standard deviation.
B)correlation between a security's risk and return.
C)weighted average of all possible outcomes.
D)same as the discrete probability distribution.
Q3) Portfolio risk can be reduced by reducing portfolio weights for assets with relatively high positive correlations.
A)True
B)False
Q4) When constructing a portfolio,standard deviations,expected returns,and correlation coefficients are typically calculated from historical data.Why may that be a problem?
Q5) Why was the Markowitz model impractical for commercial use when it was first introduced in 1952?What has changed by the 1990s?
Q6) An efficiently diversified portfolio still has _____________________ risk.
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Chapter 8: Portfolio Selection
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Q1) Explain what is efficient about the efficient frontier.
Q2) Which of the following statements about diversification is most accurate?The purpose of diversification is to:
A)increase a portfolio's expected return.
B)reduce a portfolio's non-diversifiable risk.
C)reduce a portfolio's systematic risk.
D)reduce a portfolio's total risk.
Q3) Bob holds a portfolio of 20 stocks from different industries,whereas Sharon holds only one stock in her portfolio.Assuming they each add a stock to their portfolio,which of the following is most likely? Relative to Bob's portfolio,Sharon's portfolio will experience the:
A)larger increase in total risk.
B)larger increase in return.
C)larger decrease in total risk.
D)larger decrease in market risk.
Q4) An indifference curve shows:
A)the one most desirable portfolio for an investor.
B)all combinations of portfolios that are equally desirable to an investor.
C)all combinations of portfolios that are equally desirable to all investors.
D)the one most desirable portfolio for all investors.
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Chapter 9: Asset Pricing Models
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Q1) The expected return on the market for next period is 11 percent.The risk-free rate is 4 percent,and Alpha Company has a beta of 1.1.The market risk premium is:
A)7.7 percent.
B)7 percent.
C)11 percent.
D)12.1 percent.
Q2) Using the separation theorem,it is necessary to match each investor's indifference curves with a particular efficient portfolio.
A)True
B)False
Q3) The APT is based on the law of one price,which states two identical assets cannot sell at different prices.
A)True
B)False
Q4) Unlike the CAPM,the APT does not assume borrowing and lending at the risk-free rate.
A)True
B)False
Q5) What is the formula for the slope of the CML?What does it represent?
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Chapter 10: Common Stock Valuation
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Q1) An increase in interest rates generally reduces P/E ratios and stock prices.
A)True
B)False
Q2) Which of the following is not a term used to describe the denominator in the discounted cash flow model?
A)Discount rate
B)Compounding rate
C)Required rate of return
D)Capitalization rate
Q3) What are two major approaches used to value stocks?
A)Discounted cash flow techniques and absolute valuation techniques
B)Discounted cash flow techniques and relative valuation techniques
C)Compound free cash flow techniques and relative valuation techniques
D)Markowitz diversification techniques and relative valuation techniques
Q4) Which of the following is not one of the steps in using discounted cash flow to value a company?
A)Estimate the amount and timing of the future stream of cash flows
B)Estimate an appropriate discount rate
C)Use a present value model to calculate an intrinsic value
D)Compare the intrinsic value to the relative value metric
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Chapter 11: Common Stocks: Analysis and Strategy
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Q1) Which of the following statements concerning index funds and actively managed funds is true?
A)Their performance is about equal.
B)They tend to have an inverse relationship.
C)Actively managed funds tend to outperform index funds.
D)Index funds tend to outperform actively managed funds.
Q2) Sector rotation:
A)is a form of passive investing.
B)is an active strategy similar to stock selection.
C)varies the percentage of equities in the portfolio in order to earn abnormal returns.
D)is not dependent on an accurate assessment of current economic conditions.
Q3) One of the major benefits of employing a buy and hold strategy is the savings on trading costs.
A)True
B)False
Q4) What are the major reasons investing in index funds works,according to Burton Malkiel?
Q5) In an upward trending market,what sectors might investors consider to increase absolute returns?
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Chapter 12: Market Efficiency
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Q1) Which of the following best describes the so-called size effect?
A)On average,small cap stocks return more than large cap stocks.
B)On average,large cap stocks return more than small cap stocks.
C)On average,small cap stocks earn abnormal returns.
D)Small cap stocks tend to perform exceptionally well during bull markets.
Q2) Data mining refers to the search for security return patterns by:
A)regressing firm stock returns against firm price multiples.
B)calculating CARs relative to firm earnings announcements.
C)applying various investment techniques to a set of return data.
D)applying filter tests to very large samples of return data.
Q3) The overconfidence bias tends to encourage investors to:
A)trade too much.
B)trade too infrequently.
C)sell winners to early.
D)hold losers to long.
Q4) Evidence indicates that the majority of actively-managed,large cap equity funds outperform the S&P 500 Index.
A)True
B)False
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Chapter 13: Economy Market Analysis
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Q1) During periods of restrictive Federal Reserve monetary policy,the stock market usually performs poorly.
A)True
B)False
Q2) Which of the following is not a type of index of general economic activity?
A)Lagging indicators
B)Emerging indicators
C)Leading indicators
D)Coincident indicators
Q3) The National Bureau of Economic Research (NBER)is:
A)a division of the Department of Commerce of the U.S.Government.
B)an association of academic and professional economic forecasters.
C)a unit within the U.S.Federal Reserve.
D)a private nonprofit organization.
Q4) Over the past 30 years,the average P/E ratio for the S&P 500 has been 20.
A)True
B)False
Q5) Use the constant-growth dividend discount model to explain why stock prices have an inverse relationship to interest rates.
Page 15
Q6) Why do stock investors pay attention to the bond market?
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Chapter 14: Industry Analysis
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Q1) Standard and Poor's new Global Industry Classification Standard includes approximately:
A)10,000 companies.
B)25,000 companies.
C)60,000 companies.
D)100,000 companies.
Q2) Which of the following sectors was most adversely affected by the accounting changes requiring the expensing of stock options?
A)Manufacturing
B)Technology
C)Energy
D)Utilities
Q3) The basic competitive forces facing industries include all of the following except:
A)bargaining power of suppliers.
B)threat of government regulation.
C)rivalry between existing competitors.
D)threat of substitute products.
Q4) How can historical performance help the analyst assess the future prospects for an industry?
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Chapter 15: Company Analysis
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Q1) Which of the following is not one of the parts of the cash flow statement?
A)Cash flow from operating activities
B)Cash flow from sales activities
C)Cash flow from investing activities
D)Cash flow from financing activities
Q2) How could unexpected inflation affect the P/E ratio?
Q3) Which of the following is not true regarding earnings estimates?
A)Some companies provide guidance on forthcoming earnings announcements.
B)The guidance number plays a major role in the consensus estimate.
C)The variance of actual reported earnings from the consensus had typically constituted the "whisper" forecast.
D)All of the above are true.
Q4) The key item for investors on the income statement is:
A)sales.
B)interest expense.
C)cost of goods sold.
D)net income from continuing operations.
Q5) When an investor buys a share of common stock he/she buys a claim of ownership.How is this claim represented on the balance sheet?
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Chapter 16: Technical Analysis
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Q1) If a trend exhibits support and resistance levels simultaneously that appear well defined,the trend lines are referred to as channel lines.
A)True
B)False
Q2) Which of the following is not a contrary trading rule?
A)Relative strength ratio
B)Investment advisory opinions
C)Mutual fund liquidity positions
D)Put/call ratio
Q3) Technical analysis utilizes a top-down,fundamental approach to common stock analysis.
A)True
B)False
Q4) Technical analysis focuses on timing and on the short run.
A)True
B)False
Q5) Technical analysts agree with fundamental analysts regarding the usefulness of accounting data.
A)True
B)False
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Chapter 17: Bond Yields
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Q1) Bond traders use the term "basis point" to mean one percentage point in interest rate.
A)True
B)False
Q2) The term structure of interest rates denotes the relationship between _____________ and _________________ for a specific category of bonds at a particular point in time.
Q3) Sam holds a $1 million bond portfolio with an average maturity of 9 years,whereas Walt holds a $1 million bond portfolio with an average maturity of 3 years.If interest rates increase substantially,Sam's portfolio will experience the:
A)larger decline in value of the two portfolios.
B)larger increase in value of the two portfolios.
C)smaller decline in value of the two portfolios.
D)smaller increase in value of the two portfolios.
Q4) A financial crisis or an accounting scandal can just as easily cause yield spreads to widen as weak earnings at a company.
A)True
B)False
Q5) Yield spreads vary inversely with the: ______________________________.
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Chapter 18: Bonds: Analysis and Strategy
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Q1) Which of the following statements is true regarding investments in bonds?
A)Shorter maturity bonds generally return more than longer maturity bonds.
B)Treasury bonds generally return more than corporate bonds of the same maturity.
C)Longer maturity bonds generally return more than shorter maturity bonds.
D)Higher-rated bonds generally return more than lower-rated bonds.
Q2) Relative to actively-managed bond funds,a major advantage of bond index funds is their:
A)higher performance.
B)ability to shelter income from taxes.
C)lower expense ratios.
D)lower duration.
Q3) If two coupon bonds are equivalent in all other respects,which will have the higher convexity?
A)The bond with the higher coupon.
B)The bond with the longer maturity.
C)The bond with the greater yield.
D)The bond with the lower credit rating.
Q4) Immunization is intended to protect a portfolio against interest rate risk.What should be done?How does it work?
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Chapter 19: Options
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Q1) Put and call options on gold are considered:
A)commodity derivatives.
B)financial derivatives.
C)forward contracts.
D)futures contracts.
Q2) Which of the following statements about call options is false?
A)A call is in the money if the stock price exceeds the exercise price.
B)A call has no time value if its intrinsic value is zero.
C)If a call is out of the money,its intrinsic value is zero.
D)If a call is in the money,its intrinsic value is zero.
Q3) Which of the following market participants seeks to earn a return without assuming risk by constructing riskless positions?
A)A speculator
B)A call writer
C)A put writer
D)An arbitrageur
Q4) An investor wants to hedge the Apple stock he holds in his portfolio.How can he use a covered call to do this?
Q5) What is meant by portfolio insurance?
Q6) What is put-call parity?How is it related to arbitrage?
Page 21
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Chapter 20: Futures
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Q1) The intermarket spread is also known as a quality spread,involving two different markets,such as buying an NYSE contract and selling an S&P contract for the same month.
A)True
B)False
Q2) With futures,hedging requires one to simply take an opposite position.
A)True
B)False
Q3) To protect the value of a bond portfolio against a rise in interest rates using bond futures contracts,the portfolio owner should execute a:
A)long hedge.
B)duration hedge.
C)short hedge.
D)maturity hedge.
Q4) As an economic function of futures markets,what does "price discovery" mean?
A)The futures price and spot price converge over time.
B)The spot price is a discounted value of the futures price.
C)The futures price provides information about the expected future spot price.
D)In equilibrium,the spot price and futures price are equal.
Q5) Briefly discuss the concept of margin in futures trading.
Page 22
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Chapter 21: Portfolio Management
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Q1) What are the differences between individual investors and institutional investors?
Q2) Retirees would likely have a greater percentage of their wealth in common stock than would a recent college graduate.
A)True
B)False
Q3) Relative to their holdings in their early careers,conservative retirees likely have greater holdings of:
A)small-cap stocks.
B)international stocks.
C)cyclical stocks.
D)low-beta stocks.
Q4) Which of the following statements about investment strategies is true? Constant proportion portfolio insurance is a:
A)contrarian strategy,whereas constant mix is a momentum strategy.
B)momentum strategy,whereas constant mix is a contrarian strategy.
C)contrarian strategy as is constant mix.
D)momentum strategy as is constant mix.
Q5) What are the steps in the portfolio management process?
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Chapter 22: Evaluation of Investment Performance
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Q1) The information ratio is calculated as the ratio of:
A)mean active return to tracking risk.
B)alpha to beta.
C)excess return to portfolio standard deviation.
D)portfolio excess return to tracking risk.
Q2) According to Jensen's differential return measure,what is alpha?
A)The intercept of the SML line
B)The intercept of the CML line
C)A measure of the superior or inferior performance on a portfolio
D)The actual excess return on a portfolio during one period
Q3) Treynor's measure is a ratio of excess return to systematic risk.
A)True
B)False
Q4) GIPS was created to obtain global acceptance of a standard for fair presentation.
A)True
B)False
Q5) What are the appropriate uses of the Sharpe and the Treynor performance measures?
Q6) What is the major difference between the Sharpe and Treynor measures?
Page 24
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