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Question 1 of 10
1. Question
What are the features of Modern Portfolio Theory?
I. It states that it is possible to control the risk and return of investment portfolios.
II. As per MPT, it is possible to identify the relationship of risk and reward in the portfolio as a whole instead of analyzing individual investments.
III. It is done with the assistance of CAPM.
IV. It allows the investor to increase returns while reducing risk.
Correct
Modern portfolio theory states that it is possible to control the risk and return of investment portfolios. According to modern portfolio theory, it is possible to identify the relationship of risk and reward in the portfolio as a whole instead of analyzing individual investments. This is done with the assistance of CAPM, which suggests that securities that have higher risks come with greater rewards, and investments with less risk result in lower rewards. This allows the investor to increase returns while reducing risk.
Incorrect
Modern portfolio theory states that it is possible to control the risk and return of investment portfolios. According to modern portfolio theory, it is possible to identify the relationship of risk and reward in the portfolio as a whole instead of analyzing individual investments. This is done with the assistance of CAPM, which suggests that securities that have higher risks come with greater rewards, and investments with less risk result in lower rewards. This allows the investor to increase returns while reducing risk.
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Question 2 of 10
2. Question
Which is not a feature of Weak form efficient market?
Correct
The weak form of the efficient market hypothesis states that the prevailing prices of securities are indicative of past information that was available regarding price and volume. It is called “weak form” because having this information is not a “strong” indication of where the prices of securities are headed, since it is a widely known quantity. The efficient market hypothesis states that having this information should not provide anyone with an advantage to obtain greater returns than the market because everyone has access to it. Price and trading volume are the foundations of technical analysis, which attempts to predict security and market movement based on the known quantities of price and trading volume. Thus, according to the efficient market theory, technical analysis is useless in predicting future market movements.
Incorrect
The weak form of the efficient market hypothesis states that the prevailing prices of securities are indicative of past information that was available regarding price and volume. It is called “weak form” because having this information is not a “strong” indication of where the prices of securities are headed, since it is a widely known quantity. The efficient market hypothesis states that having this information should not provide anyone with an advantage to obtain greater returns than the market because everyone has access to it. Price and trading volume are the foundations of technical analysis, which attempts to predict security and market movement based on the known quantities of price and trading volume. Thus, according to the efficient market theory, technical analysis is useless in predicting future market movements.
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Question 3 of 10
3. Question
Which is not a major asset class?
Correct
The three major asset classes are:
Stocks, which can be further categorized by geographical location (foreign or domestic), market capitalization, and whether the underlying holdings are value or growth stocks. Bonds, segmented by maturity terms (long, short, or intermediate) and corporate or government issuance. Cash, or risk-free investments such as three-month Treasury bills and other money market instruments.Incorrect
The three major asset classes are:
Stocks, which can be further categorized by geographical location (foreign or domestic), market capitalization, and whether the underlying holdings are value or growth stocks. Bonds, segmented by maturity terms (long, short, or intermediate) and corporate or government issuance. Cash, or risk-free investments such as three-month Treasury bills and other money market instruments. -
Question 4 of 10
4. Question
Which is not a feature of Strategic asset allocation?
I. The allocation describes a long-term style of portfolio management in which the assets are unequally proportioned based on long-term goals, needs, and time horizon.
II. The more aggressive the goals of the investor, the higher allocation of the account value would be assigned to equity securities.
III. It attempts to capitalize on modern portfolio theory by holding inversely correlated assets to reduce risk and increase returns.
IV. In the long term, the account is “rebalanced” to make sure the allocation still matches the investor’s goals.
Correct
Strategic asset allocation describes a long-term style of portfolio management (as opposed to short-term tactical asset allocation) in which the assets are unequally proportioned based on long-term goals, needs, and time horizon. These goals determine the allocation of assets between equity securities and debt/cash securities. The more aggressive the goals of the investor, the higher allocation of the account value would be assigned to equity securities, and vice versa concerning more conservative goals and debt/cash securities. Strategic asset allocation attempts to capitalize on modern portfolio theory by holding inversely correlated assets to reduce risk and increase returns. Over the long term, the account is “rebalanced” to make sure the allocation still matches the investor’s goals.
Incorrect
Strategic asset allocation describes a long-term style of portfolio management (as opposed to short-term tactical asset allocation) in which the assets are unequally proportioned based on long-term goals, needs, and time horizon. These goals determine the allocation of assets between equity securities and debt/cash securities. The more aggressive the goals of the investor, the higher allocation of the account value would be assigned to equity securities, and vice versa concerning more conservative goals and debt/cash securities. Strategic asset allocation attempts to capitalize on modern portfolio theory by holding inversely correlated assets to reduce risk and increase returns. Over the long term, the account is “rebalanced” to make sure the allocation still matches the investor’s goals.
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Question 5 of 10
5. Question
What does not stand true for the constant dollar plan?
I. It achieves asset allocation through rebalancing based on the ratio percentage of equity securities to bond/cash securities.
II. It restores the original asset allocation.
III. It seeks to maintain asset allocation based on a fixed dollar amount of equity investments.
IV. If the value of the equities falls, the difference is made up from the money market instruments.
Correct
In contrast, per the name of the strategy, the constant dollar plan seeks to maintain asset allocation based on a fixed dollar amount of equity investments. If the value of the equities rises above the fixed amount, the excess is sold and held in money market instruments. if the value of the equities falls, the difference is made up from the money market instruments.
Incorrect
In contrast, per the name of the strategy, the constant dollar plan seeks to maintain asset allocation based on a fixed dollar amount of equity investments. If the value of the equities rises above the fixed amount, the excess is sold and held in money market instruments. if the value of the equities falls, the difference is made up from the money market instruments.
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Question 6 of 10
6. Question
What are the disadvantages of active investment account management?
I. Higher tax rates.
II. Trading and other fees that can be very high.
III. Not suitable for investors with short time horizons.
IV. Daily approach to market management.
Correct
Active investment account management is a hands-on, daily approach to market management. Active managers seek to time the market or buy and sell at the right time to gain returns. An example of this type of management is tactical asset allocation. The advantage to this type of management is that if properly done, the account can exceed normal market returns. Among the disadvantages of this type of account are higher tax rates (than passively managed accounts) due to short-term capital gains, and trading and other fees that can be very high.
Incorrect
Active investment account management is a hands-on, daily approach to market management. Active managers seek to time the market or buy and sell at the right time to gain returns. An example of this type of management is tactical asset allocation. The advantage to this type of management is that if properly done, the account can exceed normal market returns. Among the disadvantages of this type of account are higher tax rates (than passively managed accounts) due to short-term capital gains, and trading and other fees that can be very high.
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Question 7 of 10
7. Question
What are the features of Income-producing securities?
I. They tend to be very stable investments that provide some sort of regular payment to the investor.
II. These types of securities range from bonds/debt instruments to preferred stocks.
III. These are conservative investments that provide income usually to retirees with short time horizons.
IV. Investors have a long time horizon to make up potential losses due to the volatility of the stocks.
Correct
Income-producing securities tend to be very stable investments that provide some sort of regular payment to the investor. These types of securities range from bonds/debt instruments to preferred stocks. Income-producing securities are conservative investments that provide income usually to retirees with short time horizons, but also to other investors with current income as an objective.
Incorrect
Income-producing securities tend to be very stable investments that provide some sort of regular payment to the investor. These types of securities range from bonds/debt instruments to preferred stocks. Income-producing securities are conservative investments that provide income usually to retirees with short time horizons, but also to other investors with current income as an objective.
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Question 8 of 10
8. Question
Why is diversification important?
I. An undiversified portfolio can lead to high rates of unnecessary risk.
II. Diversification can reduce market risk and increase returns.
III. The securities that make up a diversified portfolio tend to be negatively correlated.
IV. Diversified portfolio proves modern portfolio theory of the relationship of reduced risk/higher return.
Correct
Diversification is a very important concept to most investors. Most investors feel, and rightly so, that an undiversified portfolio can lead to high rates of unnecessary risk. Diversification is the practice of spreading one’s assets among a wide selection of investments from different asset classes. Most investors agree that diversification will reduce market risk and increase returns. This is an essential tenet of modern portfolio theory. The securities that make up a diversified portfolio tend to be negatively correlated; that is, the securities’ prices move in opposite directions to hedge against unfavorable market movement. This hedge will provide returns in one asset class as the other asset class moves downward, thereby still providing returns in a declining market and thus proving modern portfolio theory of the relationship of reduced risk/higher return in a diversified portfolio.
Incorrect
Diversification is a very important concept to most investors. Most investors feel, and rightly so, that an undiversified portfolio can lead to high rates of unnecessary risk. Diversification is the practice of spreading one’s assets among a wide selection of investments from different asset classes. Most investors agree that diversification will reduce market risk and increase returns. This is an essential tenet of modern portfolio theory. The securities that make up a diversified portfolio tend to be negatively correlated; that is, the securities’ prices move in opposite directions to hedge against unfavorable market movement. This hedge will provide returns in one asset class as the other asset class moves downward, thereby still providing returns in a declining market and thus proving modern portfolio theory of the relationship of reduced risk/higher return in a diversified portfolio.
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Question 9 of 10
9. Question
How can you best define Put?
Correct
A put is an options contract between two parties in which the seller guarantees the buyer the right to sell a security to the seller of the put at a set price, regardless of the current price of the security.
Incorrect
A put is an options contract between two parties in which the seller guarantees the buyer the right to sell a security to the seller of the put at a set price, regardless of the current price of the security.
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Question 10 of 10
10. Question
What term is used for a call contract in which the seller owns the underlying security of the call which he or she is selling?
Correct
A call is an options contract between two parties in which the seller guarantees the buyer the right to buy the underlying security of the call at a set price, regardless of the current price of the security. A “covered call” is a call contract in which the seller owns the underlying security of the call which he or she is selling.
Incorrect
A call is an options contract between two parties in which the seller guarantees the buyer the right to buy the underlying security of the call at a set price, regardless of the current price of the security. A “covered call” is a call contract in which the seller owns the underlying security of the call which he or she is selling.