HS 328 - EXAM 2 QUESTIONS AND ANSWERS
The decision of whether to go public is an important one for private companies. Which
of the following statements is (are) a disadvantage of going public?
I. Loss of some control over business operations
II. The obligation to file annual and quarterly reports to the SEC
a. I only
b. II only
c. Both I and II
d. Neither I nor II - Answer -c. Both I and II
Explanation: Companies that go public have less control over their business operations
and must file reports to the SEC.
At 11 PM EST, an investor in New York buys shares of a company listed on the NYSE.
Through which of the following did the investor make this purchase?
a. An organized exchange
b. An over-the-counter market
c. The fourth market
d. The primary market - Answer -b. An over-the-counter market
Explanation: The "third market" involves over-the-counter trades of exchange-listed
securities after those exchanges have closed.
The goals of regulatory oversight include all the following EXCEPT
a. reducing inequality.
b. enhancing transparency.
c. increasing integrity.
d. maintaining accuracy in financial reporting. - Answer -a. reducing inequality.
Explanation: The goals of regulatory oversight are fostering transparency, integrity, and
accuracy.
Which securities law regulates the offering and sale of securities in the primary market
and ensures more transparency in financial statements?
a. The Securities Act of 1933
b. The Securities Exchange Act of 1934
c. The Investment Advisers Act of 1940
d. The Investment Company Act of 1940 - Answer -a. The Securites Act of 1933
,Explanation: The Securities Act of 1933 requires disclosures of new securities in the
primary market. The Securities Exchange Act of 1934 focuses on the trading of
securities in the secondary market. The Investment Advisers Act of 1940 regulates
investment advisers and requires registration with the SEC for firms or any individual
advisers with assets under management exceeding $100 million. The Investment
Company Act of 1940 forms the backbone of financial regulation and established the
foundation for mutual funds and hedge funds.
A young client is building a retirement portfolio. Which of the following asset allocations
is most appropriate?
a. 80% cash, 10% bonds, 10% equities
b. 5% cash, 80% bonds, 15% equities
c. 0% cash, 50% bonds, 50% equities
d. 5% cash, 10% bonds, 85% equities - Answer -d. 5% cash, 10% bonds, 85% equities
Explanation: Portfolios with long time horizons, such as the retirement portfolio of a
young client, should be dominated by equities with relatively low allocations toward
bonds and cash.
Which of the following is an example of an equity?
a. Treasury bills
b. Municipal bonds
c. Common stock
d. Real estate - Answer -c. Common stock
Explanation: Equities include common stock and preferred stock.
Which of the following is considered to be a traditional asset class for a retirement
portfolio?
a. Derivatives
b. Equities
c. Hedge funds
d. Real estate - Answer -b. Equities
Explanation: The three major asset classes for retirement portfolios are bonds, equities,
and money market securities. Real estate is considered to be an alternative investment.
An investment manager routinely uses technical analysis to outperform his benchmark
portfolio. He also finds that fundamental analysis and a little bit of insider trading (which
is illegal) provide improved returns. Based on this information, he is investing in a
market that is
a. inefficient.
, b. weak-form efficient.
c. semi-strong form efficient.
d. strong-form efficient. - Answer -a. inefficient
Explanation: Technical analysis should not provide improved returns in any type of
efficient market. This market is inefficient.
A mutual fund's returns over the past 4 years were -4%, -15%, 13%, and 13%. What
was its geometric mean return over these years?
a. 1.03%
b. 1.75%
c. 2.08%
d. 11.17% - Answer -a. 1.03%
Explanation:
GMR = [(1 + -4%) × (1 + -15%) × (1 + 13%) × (1 + 13%)](1/4) − 1
GMR = [(0.96) × (0.85) × (1.13) × (1.13)](1/4) − 1
GMR = [1.0420](1/4) − 1
GMR = 1.0103 − 1 = 0.0103 = 1.03%
Four years ago, an investor contributed $5,000 to an investment portfolio. A year later,
the investor contributed another $1,000. Another year later, the investor withdrew
$1,000. Last year, the investor contributed $2,000. Today, the portfolio is worth
$10,000. What was this investor's dollar-weighted return over the past 4 years?
a. 11.18%
b. 37.50%
c. 100.00%
d. 120.00% - Answer -a. 11.18%
Explanation:
To solve this problem using an HP10bII+, use the following keystrokes:
5,000
[+/-]
[CFj]
1,000
[+/-]
[CFj]
1,000
[CFj]
2,000
The decision of whether to go public is an important one for private companies. Which
of the following statements is (are) a disadvantage of going public?
I. Loss of some control over business operations
II. The obligation to file annual and quarterly reports to the SEC
a. I only
b. II only
c. Both I and II
d. Neither I nor II - Answer -c. Both I and II
Explanation: Companies that go public have less control over their business operations
and must file reports to the SEC.
At 11 PM EST, an investor in New York buys shares of a company listed on the NYSE.
Through which of the following did the investor make this purchase?
a. An organized exchange
b. An over-the-counter market
c. The fourth market
d. The primary market - Answer -b. An over-the-counter market
Explanation: The "third market" involves over-the-counter trades of exchange-listed
securities after those exchanges have closed.
The goals of regulatory oversight include all the following EXCEPT
a. reducing inequality.
b. enhancing transparency.
c. increasing integrity.
d. maintaining accuracy in financial reporting. - Answer -a. reducing inequality.
Explanation: The goals of regulatory oversight are fostering transparency, integrity, and
accuracy.
Which securities law regulates the offering and sale of securities in the primary market
and ensures more transparency in financial statements?
a. The Securities Act of 1933
b. The Securities Exchange Act of 1934
c. The Investment Advisers Act of 1940
d. The Investment Company Act of 1940 - Answer -a. The Securites Act of 1933
,Explanation: The Securities Act of 1933 requires disclosures of new securities in the
primary market. The Securities Exchange Act of 1934 focuses on the trading of
securities in the secondary market. The Investment Advisers Act of 1940 regulates
investment advisers and requires registration with the SEC for firms or any individual
advisers with assets under management exceeding $100 million. The Investment
Company Act of 1940 forms the backbone of financial regulation and established the
foundation for mutual funds and hedge funds.
A young client is building a retirement portfolio. Which of the following asset allocations
is most appropriate?
a. 80% cash, 10% bonds, 10% equities
b. 5% cash, 80% bonds, 15% equities
c. 0% cash, 50% bonds, 50% equities
d. 5% cash, 10% bonds, 85% equities - Answer -d. 5% cash, 10% bonds, 85% equities
Explanation: Portfolios with long time horizons, such as the retirement portfolio of a
young client, should be dominated by equities with relatively low allocations toward
bonds and cash.
Which of the following is an example of an equity?
a. Treasury bills
b. Municipal bonds
c. Common stock
d. Real estate - Answer -c. Common stock
Explanation: Equities include common stock and preferred stock.
Which of the following is considered to be a traditional asset class for a retirement
portfolio?
a. Derivatives
b. Equities
c. Hedge funds
d. Real estate - Answer -b. Equities
Explanation: The three major asset classes for retirement portfolios are bonds, equities,
and money market securities. Real estate is considered to be an alternative investment.
An investment manager routinely uses technical analysis to outperform his benchmark
portfolio. He also finds that fundamental analysis and a little bit of insider trading (which
is illegal) provide improved returns. Based on this information, he is investing in a
market that is
a. inefficient.
, b. weak-form efficient.
c. semi-strong form efficient.
d. strong-form efficient. - Answer -a. inefficient
Explanation: Technical analysis should not provide improved returns in any type of
efficient market. This market is inefficient.
A mutual fund's returns over the past 4 years were -4%, -15%, 13%, and 13%. What
was its geometric mean return over these years?
a. 1.03%
b. 1.75%
c. 2.08%
d. 11.17% - Answer -a. 1.03%
Explanation:
GMR = [(1 + -4%) × (1 + -15%) × (1 + 13%) × (1 + 13%)](1/4) − 1
GMR = [(0.96) × (0.85) × (1.13) × (1.13)](1/4) − 1
GMR = [1.0420](1/4) − 1
GMR = 1.0103 − 1 = 0.0103 = 1.03%
Four years ago, an investor contributed $5,000 to an investment portfolio. A year later,
the investor contributed another $1,000. Another year later, the investor withdrew
$1,000. Last year, the investor contributed $2,000. Today, the portfolio is worth
$10,000. What was this investor's dollar-weighted return over the past 4 years?
a. 11.18%
b. 37.50%
c. 100.00%
d. 120.00% - Answer -a. 11.18%
Explanation:
To solve this problem using an HP10bII+, use the following keystrokes:
5,000
[+/-]
[CFj]
1,000
[+/-]
[CFj]
1,000
[CFj]
2,000
