CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Investment Planning

1. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMInvestment Planning Final Review Questions

2. Risk/Return Formulas (1)

3. Risk/Return Formulas (2)

4. Question 1 • To which one of the following markets are Initial Public Offerings (IPOs) related? • primary • secondary • third • fourth

5. Question 2 • Which one of the following types of underwriting would you prefer if you were concerned about minimizing cost and placing an offering quickly? • firm commitment • stand-by underwriting • public placement • private placement • best-efforts

6. Question 3 One investment strategy is to borrow and sell shares, and then repurchase the shares at a lower price. This strategy is called • buying on margin. • shorting against the box. • a short sale. • a short option spread.

7. Question 4 • You buy 100 shares of Online Learning stock for $60 a share with an initial margin of 50% and a 30% maintenance margin. • At what price would you receive a margin call? • $44.00 • $43.50 • $42.85 • $42.00 • $40.00

8. Question 5 • Luther short sells 100 shares of JP Enterprises at $57 with a 50% margin. JP Enterprises pays a dividend of $2.00 per share after he sells the stock. He then buys back the stock for $54. • What is the profit or loss percentage of this stock? • 1.8% gain • 3.5% gain • 5.3% gain • 1.8% loss • 3.5% loss

9. Question 6 • The adjustment process in a competitive market moves toward • equilibrium. • shortage. • surplus. • stabilization.

10. Question 7 • Which one of the following best describes increasing unemployment with businesses operating at their lowest capacity levels? • peak • recession • trough • expansion

11. Question 8 • When the economy experiences a decline in real GDP for two or more successive quarters, in which one of the following stages of the economic cycle is the economy? • trough • recession • peak • recovery

12. Question 9 • The Federal Reserve can decrease the money supply by doing all of the following except • sell U.S. Treasury securities on the open market. • issue new U.S. Treasury bonds to the general public. • raise the required reserve ratio. • raise the discount rate.

13. Question 10 • Which one of the following actions by the Federal Reserve would directly increase the money supply? • lowering the discount rate • buying securities • selling securities • increasing the margin requirement

14. Question 11 • Debt-to-equity ratios of companies are used to measure which one of the following types of risk? • systematic risk • business • market • financial

15. Question 12 • Which one of the following statements about risk is true? • Undiversifiable risk is also called unsystematic risk. • Systematic risk includes business and purchasing power risk. • Default risk affects both equity and fixed income investments. • None of the above.

16. Question 13 • Rocket Inc. stock has a mean return of 18% and a standard deviation of 20. • What is the probability that the stock will have a return above 18%? • 20% • 25% • 33% • 40% • 50%

17. Question 14 • Fly-By-Night Moving Inc. has a mean return of 9% and a standard deviation of 6%. The risk-free rate is currently 3%. • What is the probability that this stock will yield a return greater than 15%? • 0% • 16% • 32% • 34% • 50%

18. Question 15 • Stock J has a standard deviation of 23% and the market has a standard deviation of 18%. The correlation coefficient between Stock J and the market is 0.80. • What percent of the change in Security J can be explained by changes in the market? • 36% • 50% • 64% • 80% • 100%

19. Question 16 • Portfolio Z has a standard deviation of 25% and the market has a standard deviation of 20%. The correlation coefficient between Portfolio Z and the market is 0.50. • What percent of the total risk is unsystematic risk? • 0% • 25% • 50% • 75% • 100%

20. Question 17 • Adding investments with a negative beta to a portfolio that currently has a beta of 1 will cause • the portfolio to be more risky in times of a bull market. • the portfolio to be more risky in times of a bear market. • the volatility of the portfolio to increase. • the expected performance of the portfolio to increase in bear markets. • the expected performance of the portfolio to decrease in bear markets.

21. Question 18 • The standard deviation of the returns of a portfolio will be ________ the weighted average of the standard deviation of returns of the individual component securities. • equal to • less than • greater than • less than or equal to • less than, equal to, or greater than

22. Question 19 Based on Markowitz’s theory of the efficient frontier, which of the following portfolios could not lay on the efficient frontier? • Portfolio 1 • Portfolio 2 • Portfolio 3 • Portfolio 4 • Portfolios 1 and 3

23. Question 20 • Which one of the following statements is true regarding the Arbitrage Pricing Theory? • Beta is a pricing factor. • Inflation is not a pricing factor. • Multiple factors affect the return of a security. • The risk-free rate of return does not affect the return.

24. Question 21 • The Capital Asset Pricing Model (CAPM) supports which of the following statements? • Returns can be expected to correspond directly with the level of risk taken. • Standard deviation is the measure of market risk. • Beta is the measure of market risk. • Beta is measured by the probability of losing the initial investment. • I only • IV only • I and II only • I and III only • II and IV only

25. Question 22 • Which one of the following forms of the efficient market hypothesis supports technical analysis? • weak • semistrong • strong • semiweak • none

26. Question 23 • Under the efficient market hypothesis, which one of the following best describes the movement of stock prices? • random • statistical • diverse • passive

27. Question 24 • Under which form of the efficient market hypothesis would fundamental analysis be useful? • weak • semistrong • strong

28. Question 25 • Hans originally purchased a stock for $45 per share. He purchased three shares, which are currently trading at $60 per share. The stock has paid dividends of $2.00 a share at the end of Year 1, and $2.30 a share at the end of Year 2. • If Hans has held the stock for two years, what is the holding period return? • 19.0% • 22.0% • 23.5% • 38.0% • 42.8%

29. Question 26 • A portfolio had an IRR of 12.5% for a two-year period. During this two-year period, $75,000 in dividends was paid each year (at year-end). The current FMV of the portfolio is $1.5 million. • What was the portfolio worth when it was purchased two years ago? • $750,000 • $1,000,000 • $1,250,000 • $1,311,111 • $1,333,333

30. Question 27 A portfolio had an IRR for a three-year period of 5.57%. During this three-year period, the dividends shown in the table were paid. The current FMV of this portfolio is $40. What was the portfolio worth when it was purchased three years ago? • $30 • $34 • $37 • $40 • $50

31. Question 28 • What is the geometric average of a stock with the following annual returns: 45%, 25%, 13% and 3%? • 18.0% • 20.5% • 21.0% • 21.5% • 22.0%

32. Question 29 • Your client, Amadeus Schmidt, owns a portfolio that returned 12% during the current year. It had a beta of 1.3 and a standard deviation of 14%. During the current year, the market earned 9%. The risk-free rate of return was 5%. Which of the following statements is (are) true? • The Treynor Index for the market is 0.0400. • The Treynor Index for Amadeus’ portfolio is 0.0092. • The Treynor Index for Amadeus’ portfolio is 0.0538. • Amadeus’ portfolio outperformed the market on a risk-adjusted basis. • I only • II only • I and III only • III and IV only • I, II, and IV only

33. Question 30 • Which of the following portfolio performance measures is (are) an absolute measure of performance? • Jensen • Sharpe • Treynor • I only • II only • III only • I and III only

34. Question 31 Natasha and Victor are considering the purchase of two stocks to add to their portfolio. Stock 1 is currently trading at $40, and Stock 2 is currently trading at $26. They believe 12% is a reasonable rate of return, and their investment objective is to earn extra income to take advantage of the preferential tax treatment of dividends. The two stocks they are considering have the following characteristics: What action should they take? • Stock 1 should be purchased because it is undervalued. • Stock 2 should be purchased because it is undervalued. • Both stocks are undervalued and should be purchased. • Neither stock is undervalued so neither should be purchased.

35. Question 32 • Agony Enterprises is currently trading at $50 per share, with assets of $150 million and liabilities of $30 million. Net income for the year was $36 million, of which $6 million was paid out in dividends. • What is the dividend growth rate for Agony? • 20% • 25% • 30% • 35%

36. Question 33 • You are considering the purchase of a stock that is currently selling for $34 per share and pays a dividend of $1.00 per share. The dividend is expected to grow at a rate of 12% for the next two years, and then grow at a constant 6% thereafter. Your required return is 9%. • The maximum price you should pay for the stock is • $35.50. • $37.25. • $39.40. • $41.75. • $44.00.

37. Question 34 • You calculate the intrinsic value of Ecstasy Enterprises and determine that it is undervalued according to the dividend discount model. • Which of the following statements is (are) now known to be true? • This stock is a suitable investment for all portfolios. • The expected return will be greater than the required return. • The required return will be greater than the expected return. • I only • II only • III only • I and II only

38. Question 35 You are considering the purchase of an investment that you believe you could sell five years later (end of year) for $10,000. During the time you will be holding the asset you anticipate the cash flows shown: Assume that the cost of capital is 7% (discount rate). What is the net present value (NPV) of this investment? • $9,378 • $9,856 • $10,004 • $10,223 • $12,666

39. Question 36 • Which one of the following is a characteristic of a corporate zero-coupon bond? • It has little price volatility. • The investor receives semi-annual interest payments. • It is subject to interest rate risk. • The investor pays taxes only when the bond matures.

40. Question 37 • Which of the following agencies is (are) backed by the full faith and credit of the United States government? • TVA • FNMA • GNMA • FHLMC • I only • III only • I and III only • II and III only • I, II, III, and IV

41. Question 38 • Which of the following are true concerning the characteristics of bonds and preferred stocks? • Unlike common stock, the rights of preferred stockholders must be satisfied prior to bondholders. • Like interest paid to bondholders, dividends paid to preferred stockholders are tax deductible by the issuing corporation. • Like bonds, preferred stock dividends must be paid whether there are earnings or not. • Preferred stock is not as risky as bonds. • III only • I and II only • II and III only • II and IV only • none of the above

42. Question 39 • What is the intrinsic value of a 7% coupon bond that matures in 20 years with interest rates on comparable debt currently at 6.5%? • $669 • $1,025 • $1,044 • $1,055 • $1,060

43. Question 40 • Current market rates are at 8%. What is the duration of a zero coupon bond yielding 9% (assume semi-annual compounding) that matures in 12 years? • 6 years • 8 years • 10 years • 12 years

44. Question 41 Consider the six A-rated bonds shown: Which of the following statements about the bonds are true? • The duration of Bond 1 is greater than Bond 2. • Bond 2 has a greater potential for price fluctuation than Bond 1. • Bond 6 has the highest potential for price fluctuation among bonds 2, 4, and 6. • Bond 5 has a higher potential for price fluctuations than Bond 4. • Bond 4 has a duration less than Bond 5. • I and II only • I, III, and IV only • II, III, and V only • I, II, III, and V only • I , III, IV, and V only

45. Question 42 • Ricky is considering the purchase of a convertible bond. The bond is currently selling at $1,040, and has a conversion price of $30 per share. The underlying stock is selling for $27 per share. The bond matures in 15 years and has a coupon rate of 5%. Comparable bonds are yielding 6%. • What is the downside risk of the bond? • $76 • $88 • $138 • $140

46. Question 43 Rank the following option strategies from the least risky to the most risky: • 1, 2, 3 • 1, 3, 2 • 3, 1, 2 • 3, 2, 1

47. Question 44 • Jakob owns a $45 put option on Galaxy Inc. Currently the option is trading at $4.50 and Galaxy is trading at $42 per share. • Which of the following option statements is (are) correct regarding Jakob’s put option? • The option is out-of-the money by $1.50. • The option has no intrinsic value. • The option has time value of $1.50. • The option is in-the-money by $3. • I only • II and III only • II and IV only • III and IV only

48. Question 45 You have been asked to advise on the value of an apartment complex with the following numbers: What is the current value? • $2,100,000 • $2,375,000 • $2,875,000 • $5,625,000

49. Question 46 • Dividend reinvestment plans have which one of the following characteristics? • deferral of taxation on dividends that are reinvested • reduction of unsystematic risk • ease of calculating capital gains or losses • low transaction costs

50. Question 47 • Which of the following statements regarding American Depository Receipts (ADRs) are correct? • ADRs have no exchange rate risk since they are priced in dollars. • ADRs are foreign shares deposited with a stock exchange. • ADRs are subject to foreign taxes on dividends that are paid. • When subject to a foreign tax on dividends, an offsetting U.S. tax credit is available to ADR investors. • I and II only • III and IV only • I II, and III only • II, III, and IV only • I, II, III, and IV