Wealth Management
Textbook Exam Questions
Course Introduction
Wealth Management is a comprehensive course designed to introduce students to the principles and practices involved in growing, preserving, and transferring wealth. The course covers essential topics such as investment strategies, portfolio management, tax planning, retirement solutions, estate planning, and ethical considerations. Students will explore financial markets, asset allocation, risk assessment, and the use of financial instruments to meet individual and institutional financial goals. Emphasis is placed on client relationship management, holistic financial planning, and the regulatory environment governing wealth management services. Through case studies and practical exercises, students will develop the analytical and advisory skills necessary for successful careers in the wealth management industry.
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) Sources of risk for an investment include
A) Variance of returns and business risk
B) Coefficient of variation of returns and financial risk
C) Business risk and financial risk
D) Variance of returns and coefficient of variation of returns
E) All of the above
Answer: C
Q2) Refer to Exhibit 1.4.Compute the coefficient of variation for your portfolio.
A) 0.043
B) 0.12
C) 1.40
D) 0.69
E) 1.04
Answer: E
Q3) The two most common calculations investors use to measure return performance are arithmetic means and geometric means.
A)True
B)False
Answer: True
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Page 3
Chapter 2: The Asset Allocation Decision
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Q1) Refer to Exhibit 2.1.What is the tax liability for a single individual with taxable income of $85,000?
A) $23,800
B) $18,427
C) $24,958
D) $16,867
E) $19,650
Answer: B
Q2) The gifting phase is similar to,and may be concurrent with,the spending phase.
A)True
B)False
Answer: True
Q3) Equity allocations of pension funds in Japan and Germany are similar to those in the United States.
A)True
B)False Answer: False
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Chapter 3: The Global Market Investment Decision
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Sample Questions
Q1) A return series has an arithmetic mean of 12.8% and standard deviation of 7.8%.Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 90% of the time?
A) 12.8% to 20.6%
B) -10.6% to 36.2%
C) -2.8% to 28.4%
D) -12.8% to 20.6%
E) 10.6% to 36.2%
Answer: C
Q2) If the real return for corporate bonds was 4% and the inflation rate was 2%,what is the nominal return for corporate bonds?
A) 1.96%
B) 2.00%
C) 4.00%
D) 6.08%
E) 6.42%
Answer: D
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Chapter 4: Securities Markets: Organization and Operation
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Q1) Secondary equity issues are new shares offered by firms that already have stock outstanding.
A)True
B)False
Q2) The over-the-counter market includes all stocks not listed on one of the major exchanges but constitutes a lesser of a dollar value than the New York and American Exchanges combined.
A)True
B)False
Q3) The NYSE is a dealer market.
A)True
B)False
Q4) Rule 415 allows corporations to place securities privately with large,sophisticated institutional investors without extensive registration documents.
A)True
B)False
Q5) Specialists provide added liquidity in the Nasdaq market.
A)True
B)False
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Chapter 5: Security-Market Indexes
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Q1) The NYSE series should have higher rates of return and risk measures than the AMEX and OTC series.
A)True
B)False
Q2) The Value Line Composite Average is calculated using the ____ of percentage price changes.
A) arithmetic average B) harmonic average C) expected value
D) geometric average
E) logarithmic average
Q3) A price weighted series is disproportionately influenced by larger capitalization companies.
A)True
B)False
Q4) The general purpose of a market indicator series is to provide an overall indication of aggregate market changes or movements.
A)True B)False
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Chapter 6: Efficient Capital Markets
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Sample Questions
Q1) Refer to Exhibit 6.5.What is the abnormal rate of return for Stock Z during period t using only the aggregate market return (ignore differential systematic risk)?
A) 1.80
B) 1.40
C) -1.80
D) -4.80
E) -8.80
Q2) Autocorrelation and runs tests are used to test the
A) Weak-form efficient market hypothesis (EMH).
B) Semistrong-form efficient market hypothesis (EMH).
C) Strong-form efficient market hypothesis (EMH).
D) Both a and b
E) All of the above.
Q3) The weak form of the efficient market hypothesis contends that technical trading rules are of little value.
A)True
B)False
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Page 8
Chapter 7: An Introduction to Portfolio Management
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Sample Questions
Q1) Increasing the correlation among assets in a portfolio results in an increase in the standard deviation of the portfolio.
A)True B)False
Q2) The Markowitz model is based on several assumptions regarding investor behavior.Which of the following is <b>not </b>such any assumption?
A) Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period.
B) Investors maximize one-period expected utility.
C) Investors estimate the risk of the portfolio on the basis of the variability of expected returns.
D) Investors base decisions solely on expected return and risk.
E) None of the above (that is, all are assumptions of the Markowitz model)
Q3) 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
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Chapter 8: An Introduction to Asset Pricing Models
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Sample Questions
Q1) The correlation coefficient between the market return and a risk-free asset would
A) be + .
B) be - .
C) be +1.
D) be -1.
E) be Zero.
Q2) If the wrong benchmark (or market portfolio)is selected then
A) Computed betas would be wrong.
B) The SML would be wrong.
C) Computed betas would be correct.
D) a and b.
E) b and c.
Q3) Consider a risky asset that has a standard deviation of returns of 15.Calculate the correlation between the risky asset and a risk free asset.
A) 1.0
B) 0.0
C) -1.0
D) 0.5
E) -0.5
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Page 10
Chapter 9: Multifactor Models of Risk and Return
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Q1) Findings by Basu that stocks with high P/E ratios tended to outperform stocks with low P/E ratios challenge the efficacy of the CAPM.
A)True
B)False
Q2) Under the following conditions,what are the expected returns for stocks A and B? \(\begin{array}{ll}
\lambda^{0}=0.035 & \mathrm{~b}_{\mathrm{a}, 1}=1.00 \\ \mathrm{k}_{1}=0.05 & \mathrm{~b}_{\mathrm{a}, 2}=1.40 \\ \mathrm{k}_{2}=0.06 & \mathrm{~b}_{\mathrm{b}, 1}=1.70 \\ & \mathrm{~b}_{\mathrm{b}, 2}=0.62 \end{array}\)
A) 14.8% and 13.8%
B) 19.8% and 29.5%
C) 16.0% and 19.8%
D) 16.9% and 15.9%
E) None of the above
Q3) The APT assumes that security returns are normally distributed. A)True B)False
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Chapter 10: Analysis of Financial Statements
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Sample Questions
Q1) Operating performance is divided into which two subcategories of ratios?
A) Efficiency and profitability
B) Efficiency and debt
C) Profitability and growth
D) Debt and equity
E) Liquidity and leverage
Q2) Traditional cash flow and Free cash flow are equivalent concepts.
A)True
B)False
Q3) Refer to Exhibit 10.2.What was Star's total asset turnover for 2004?
A) 1.65
B) 1.21
C) 0.92
D) 0.033
E) 0.70
Q4) Financial risk is the uncertainty of operating income caused by the firm's industry.
A)True
B)False
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Page 12
Chapter 11: Security Valuation Principles
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Q1) Discounted cash flow techniques for equity valuation may use one of the following: (1)dividends,(2)Free cash flow or (3)coupons.
A)True
B)False
Q2) Using the constant growth model,an increase in the required rate of return from 17 to 20 percent combined with an increase in the growth rate from 8 to 11 percent would cause the price to
A) Rise more than 3%
B) Rise less than 3%.
C) Remain constant.
D) Fall more than 3%.
E) Fall less than 3%.
Q3) Growth rates of the (1)labor force,(2)average number of hours worked and (3)labor productivity are the main determinants of a foreign country's
A) Dividend payout ratio.
B) Beta.
C) Real risk free rate.
D) Nominal risk free rate.
E) Risk premium.
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Page 13
Chapter 12: Macroanalysis and Microvaluation of the Stock Market
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Sample Questions
Q1) Which of the following are <b>not </b>cyclical indicators?
A) Selected series
B) Coincident indicators
C) Diffusion indicators
D) Leading indicators
E) Lagging indicators
Q2) Refer to Exhibit 12.4.To what price will the market rise if the earnings expectation is $10.00?
A) $71.40
B) $66.30
C) $54.20
D) $77.00
E) $51.10
Q3) Which of the following is <b>not</b> a factor under the Free Cash Flow to Equity (FCFE)Model?
A) Depreciation expense
B) Capital expenditure
C) Change in working capital
D) Principal debt repayment
E) Earnings multiplier
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Chapter 13: Industry Analysis
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Q1) Which of the following statements concerning the competitive environment is true?
A) High fixed costs encourage firms to produce at a low level of capacity, in order to minimize fixed cost per unit produced.
B) Low current prices relative to costs in an industry indicate low barriers to entry.
C) Substantial economies of scale do not give a current industry member an advantage over a new firm.
D) The ability to substitute another product limits the industry's profit potential.
E) Buyers and suppliers do not influence the profitability of an industry.
Q2) The capital goods industry typically outperforms other sectors during a recession.
A)True
B)False
Q3) When the government introduces a licensing requirement for an industry,it reduces the barriers to entry for the industry.
A)True
B)False
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Chapter 14: Company Analysis and Stock Valuation
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Q1) Refer to Exhibit 14.10.What is Left-Aid Corporation's expected sustainable growth rate?
A) 11.9%
B) 18.7%
C) 22.1%
D) 27.7%
E) 30.0%
Q2) Which of the following statements concerning SWOT analysis is false?
A) Strengths are the factors that give the firm a comparative advantage in the marketplace.
B) Weaknesses result when the company has potentially exploitable advantages over other firms.
C) Opportunities are environmental factors that favor the firm.
D) Threats are environmental factors that can hinder the firm in achieving its goals.
E) None of the above (that is, all statements are true)
Q3) A cyclical stock's rate of return is not expected to decline during an overall market decline.
A)True
B)False
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Chapter 15: Equity Portfolio Management Stragtegies
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Sample Questions
Q1) Refer to Exhibit 15.1.The recommended portfolio for Tom Luck is
A) Portfolio A because it has expected utility of 9.95
B) Portfolio A because it has expected utility of 4.5
C) Portfolio B because it has expected utility of 5.33
D) Portfolio B because it has expected utility of 7.27
E) Portfolio C because it has expected utility of 6.75
Q2) With dollar-cost averaging a manager purchases fewer shares when stock prices are low and more shares when stock prices are high.
A)True
B)False
Q3) A Long futures positions in the S&P500 has the effect of ____ portfolio exposure to equities,while short futures positions in the S&P500 has the effect of ____ portfolio exposure to equities.
A) Increasing, decreasing.
B) Decreasing, increasing,
C) Increasing, increasing.
D) Decreasing, decreasing.
E) None of the above.
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Chapter 16: Technical Analysis
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Q1) A technical analyst might consider the following a bearish signal.
A) The percentage of speculators in stock index futures exceeds 70%.
B) The percentage of speculators in stock index futures exceeds 30%.
C) The percentage of speculators in stock index futures falls to 30%.
D) The percentage of speculators in stock index futures remains flat.
E) None of the above.
Q2) Contrary trading rules assert that investors tend to be wrong except at market peaks and troughs.
A)True
B)False
Q3) Which of the following statements is true?
A) At a support level, the technician would expect an increase in the demand for a stock.
B) At a resistance level, the technician would expect an increase in the demand for a stock.
C) At a resistance level, the technician would expect any price increase to reverse abruptly.
D) Choices a and c
E) All of the above
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Chapter 17: Bond Fundamentals
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Q1) The following are participating issuers in bond markets:
A) Governments.
B) School districts.
C) Corporations
D) a and c.
E) a, b and c.
Q2) A 4.75 percent coupon bond issued by the State of Washington sells for $1,000.What coupon rate on a corporate bond selling at $1,000 par value would produce the same after tax return to the investor as the municipal bond if the investor is in the 28 percent marginal tax bracket?
A) 1.1%
B) 5.8%
C) 6.6%
D) 7.3%
E) 9.7%
Q3) As of 2008,approximately 80% of all new municipal bond issues are insured.
A)True
B)False
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Chapter 18: The Analysis and Valuation of Bonds
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Q1) Which of the following statements is true?
A) An inverse relationship exists between coupon and convexity.
B) A direct relationship exists between maturity and convexity.
C) An inverse relationship exists between yield and convexity.
D) Choices a and c only
E) All of the above statements are true
Q2) Assume that you purchase a 5-year $1,000 par value bond,with a 6% coupon,and a yield of 7%.Immediately after you purchase the bond,yields rise to 8% and remain at that level to maturity.Calculate the realized horizon yield if you hold the bond to maturity.Interest is paid annually.
A) 6.0%
B) 7.11%
C) 8.0%
D) 15.25%
E) 8.18%
Q3) The term structure of interest rates is a dynamic function that relates the term to maturity to the yield to maturity of bonds.
A)True
B)False
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Page 20
Chapter 19: Bond Portfolio Management Strategies
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Q1) Refer to Exhibit 19.1.The realized compound yield on the candidate bond is
A) 7.0%
B) 11.0%
C) 10.0%
D) 9.0%
E) 12.0%
Q2) Horizon matching is a combination of
A) Cash-matching dedication and interest rates swaps.
B) Cash-matching dedication and immunization.
C) Interest rate swaps and immunization.
D) Enhanced indexing and immunization.
E) Enhanced indexing and interest rate swaps.
Q3) Refer to Exhibit 19.6.The realized compound yield on the current bond is
A) 10.00%
B) 11.9985%
C) 12.9397%
D) 13.9399%
E) 12.3585%
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21
Chapter 20: An Introduction to Derivative Markets and Securities
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Q1) A put option is in the money if the current market price is above the strike price. A)True
B)False
Q2) A forward contract is similar to an option contract because they both
A) Can provide insurance against the price of the underlying stock
B) Are paid for up front in the form of premiums
C) Are paid for at the end of the contract in the form of premiums
D) Require a future settlement payment
E) None of the above
Q3) Refer to Exhibit 20.5.If at expiration Peppy is selling for $47.00,what is Sarah's dollar gain or loss?
A) $25 loss
B) $250 loss
C) $25 gain
D) $250 gain
E) None of the above
Q4) A primary function of futures markets is to allow investors to transfer risk.
A)True
B)False
22
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Chapter 21: Forward and Futures Contracts
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Q1) The number of future contracts needed to hedge a unit of the spot assets is solely a function of the variance of the spot prices.
A)True
B)False
Q2) Which of the following is true when FS1U1B1?,TS1U1B0 < E(SS1U1B1TS1U1B0)?
A) Occurs when long hedgers outnumber short hedgers.
B) Occurs when short hedgers outnumber long hedgers.
C) The market is said to be in contango.
D) The market is said to be in normal contango.
E) The pure expectations hypothesis holds.
Q3) The most popular financial futures in terms of average daily volume is the A) OEX contracts.
B) S&P 500 contracts.
C) LIBOR contracts.
D) T-bill contracts.
E) T-bond contracts.
Q4) Like future contracts,all forward contracts are processed by a clearing corporation.
A)True
B)False
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Chapter 22: Option Contracts
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Q1) Refer to Exhibit 22.1.If the spot rate at expiration is $0.75 and the put option was purchased,what is the dollar gain or loss?
A) $0
B) $200 loss
C) $200 gain
D) $3160 gain
E) $1187 loss
Q2) A price spread (or vertical spread)involves buying and selling an option for the same stock and expiration date but with different exercise prices.
A)True
B)False
Q3) Refer to Exhibit 22.3.Use the Black-Scholes option pricing model to calculate the price of a call option.
A) $5.19
B) $4.35
C) $3.93
D) $6.19
E) $8.17
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Chapter 23: Swap Contracts,convertible Securities,and
Other Embedded Derivatives
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Q1) ____ has coupons denominated in a currency other than that of their principal.
A) Eurodollar bonds
B) Dual currency bonds
C) Euromarket bonds
D) Bi-currency bonds
E) Forward currency bonds
Q2) The exercise price of The American Dairy Company is $17.You purchase the warrants for $4.00 each when American Dairy's stock price is $20.00 a share.Each warrant entitles you to purchase one share of ADC stock.Calculate your percentage gain assuming the warrant premium drops by 50% and you sell your warrants when the stock reaches $30.00 per share.
A) 37.5%
B) 87.5%
C) 137.5%
D) 237.5%
E) 337.5%
Q3) The investment value of a convertible bond is the price which it would be expected to sell as a straight debt instrument.
A)True
B)False
Page 25
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Chapter
Assets, and Industry Ethics
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Q1) If the Micro mutual fund was originated by selling $250,000 of stock at $10.00 per share.Calculate its current NAV if the fund consists of the following four stocks. \[\begin{array} { c c c }
\text { Stack } & \text { Gheras } & \text { Price } \\
\hline Q & 9,500 & \$ 10.75 \\
R & 7,200 & \$ 13.90 \\ \text { S } & 4,50 [ & \$ 22.25 \\
T & 6,800 & \$ 14.75
\end{array}\]
A) $5.78
B) $10.00
C) $12.43
D) $16.11
E) $19.21
Q2) Open-end investment companies continue to sell and repurchase shares after their initial public offering.
A)True B)False
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Chapter 25: Evaluation of Portfolio Performance
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Q1) Portfolio managers are often evaluated using a boxplot of returns for a universe of investors over a specific period of time which is known as a(n)
A) Return adjusted comparison
B) Efficient frontier comparison
C) Time plot comparison
D) Peer group comparison
E) None of the above
Q2) Which of the following performance measures is the most rigorous risk-adjustment process separating systematic and unsystematic risk?
A) Treynor ratio
B) Sharpe ratio
C) Jensen's Alpha
D) Information ratio
E) None of the above
Q3) Investors want their portfolio managers to completely diversify their portfolio,that is,eliminate all systematic risk.
A)True
B)False
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Chapter 26: Investment Return and Risk Analysis Questions
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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
Q2) 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
Q3) 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
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Chapter 27: Investment and Retirement Plans
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Q1) Which of the following is <b>not</b> true regarding defined contribution pension plans?
A) Employees make regular contributions to the plan.
B) Employers make regular contributions to the plan.
C) The employer bears all of the investment risk.
D) Benefits are directly related to the earnings of the funds investments.
E) The number of defined contribution plans is increasing.
Q2) Banks typically have short-term investment horizons because A) They have a strong need for liquidity.
B) They offer short-term deposit accounts.
C) They are required to by federal and state laws.
D) Choices a and b
E) All of the above
Q3) Many endowments are tax-exempt.
A)True B)False
Q4) Cash flows for nonlife insurance companies,such as property and casualty,are similar to cash flows of life insurance companies.
A)True
B)False
29
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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 covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
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 3A.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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Chapter 29: Portfolio Variance and Stock Weight
Calculations
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Q1) 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
Q2) 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
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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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