©2015, college for financial planning, all rights reserved. cfp 2 true/false questions certified...

©2015, College for Financial Planning, all rights reserved.

CFP 2True/False Questions

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMInvestment Planning

Video

Play Video

• Open-ended & True/False Questions

• 7 minutes

• Play video from Video Layout

2


Module 1Security Markets & The Economic Environment


Module 1 True/False

1. Examples of financial intermediaries are banks, mutual funds, and insurance companies.

Your answer

Play Jeopardy music

4

Module 1 True/False

2. The SEC requires private placements to make a full disclosure.

3. Investment bankers do not issue securities, but they do serve as advisers to firms that want to raise capital.

4. Margin is a way to leverage return with very little risk.

5. Brokerage commissions are determined by the SEC.

6. Repurchase agreements are subject to market risk because of their long-term maturities.

5

Module 1 True/False

7. To become a registered representative with FINRA, a planner must pass one or more FINRA exams; to become a registered investment adviser within a state, an exam is also required.

8. Blue-sky laws make it possible for the SEC to enforce securities laws and prevent market manipulation, deception, misrepresentation of facts, and fraudulent practices.

9. The Securities Act of 1933 requires that new securities be registered with the SEC and that adequate and accurate disclosure be provided to buyers by the prospectus.

6

Module 1 True/False

10. The Dodd-Frank Wall Street Reform Act created an independent Consumer Financial Protection Bureau, which oversees institutions that offer financial products and services, both banks and non-banks.

11. A registered investment adviser cannot charge both fees and receive commissions.

12. Gains from the sales of capital assets can be offset by capital losses, dollar for dollar.

13. A wash sale involves selling securities on which capital losses can be realized and then buying them back 30 days later.

7

Module 1 True/False

14. During periods of economic prosperity, security prices tend to decline.

15. Three economic goals of the Federal Reserve and the U.S. Treasury are full employment, stable prices, and growth in the supply of money.

16. When the Fed purchases Treasury securities (using the monetary policy tool of open market operations), economic growth is stimulated and stock prices rise.

17. When the federal government utilizes the fiscal policy tool of increasing taxes, stock prices drop because corporate earnings are reduced.

8

Module 1 True/False

18. For investment purposes, an important component of industry analysis is business cycle analysis, because the stocks of most industries closely follow this cycle.

19. The supply of a product is influenced by the product’s price, its production cost, and the level of technology required to produce it.

20. When consumer confidence declines, consumer spending typically declines.

9

Module 1 True/False

21. During the contraction phase of the economic cycle, the rate of inflation tends to be low.

22. During the recovery phase of the economic cycle, real assets tend to underperform the market.

23. During the expansion phase of the economic cycle, unemployment declines.

24. During the contraction phase of the economic cycle, productivity increases.

25. Gross domestic product measures productivity.

26. The consumer price index is a measure of inflation.

10

Module 1 True/False

27. Leading economic indicators forecast the direction of the economy.

28.Form ADV Part 2 is written in narrative form, and any changes made from the previous filing must be summarized up front.

29.The overall maximum FDIC coverage an individual has with any one covered bank is $250,000.

11


Module 2Investment Risk & Return


Module 2 True/False1. Total risk is comprised of systematic risk plus

unsystematic risk.

2. An investment portfolio of mutual funds from highly correlated asset classes will have less risk than a portfolio of mutual funds from asset classes that are not highly correlated.

3. Client Oscar Moore should achieve his investment goal of less volatility than there is in the general market if, in his current portfolio of equally weighted mutual funds, he increases the proportion of funds with a beta of 0.7 and decreases the proportion of funds with a beta of 1.3.

13

Module 2 True/False

4. Client Britt Smith, who owns a stock portfolio with a weighted beta of 1.4 and a mutual fund bond portfolio with a weighted beta of 0.9, should achieve her goal of lower risk if she shifts some of the money in the mutual fund portfolio into the stock portfolio.

5. Client Ron Price, who enjoys taking risks, should achieve his goal of a higher return than the general market if he increases his holdings of Adam stock, which has a beta of 1.5, and decreases his holdings of FSM stock, which has a beta of 1.0.

14

Module 2 True/False

6. Systematic risk is a risk that affects whole classes of securities.

7. Interest rate risk is the chance that investment returns will be affected by changes in the level of interest rates.

8. The U.S. government is said to be free of financial risk because there is no uncertainty associated with its income flows.

9. Some common stocks have more liquidity risk than others because of a “thin” market.

10. If a stock’s return has a large standard deviation, it suggests that the stock has little risk.

15

Module 2 True/False

11. If the returns on two stocks are highly and positively correlated (i.e., the correlation coefficient is +1.0), combining these stocks will reduce the risk associated with the portfolio.

12. If a stock has a beta of 1.0, it is a risk-free stock.

13. Stocks with low betas generate better returns in declining markets.

14. If a stock’s beta coefficient is 1.7, it implies that the stock’s return tends to be less volatile than the market’s return.

15. Systematic risk can be reduced through diversification.

16

Module 2 True/False

16. A portfolio consisting of securities whose returns are highly correlated is not truly diversified.

17. The coefficient of determination is the square root of the correlation coefficient.

18. Purchasing power, market risk, and exchange rate risk are all examples of systematic risk.

19. Business risk reflects the amount of debt (leverage) that a company uses.

20. A weighted average standard deviation can only be used when the correlation coefficient is 0.

21. A low beta always means that a stock is less risky than the general market.

17

Module 2 True/False

22. The Jaguar Mutual Fund has a covariance of 45 with the S&P 500, and the Leopard Fund has a covariance of 78 with the S&P 500. The Leopard Fund should be chosen for diversification since it has the higher covariance.

23. Oftentimes, the yield on Treasury bills is used for the risk-free rate.

24. The market risk premium is the difference between the return of the market and the risk-free rate.

25. The Capital Asset Pricing Model allows an investor to calculate required return, and it adjusts the required return for risk by using beta.

18

Module 2 True/False

26. Correlations remain relatively stable over time, and stay the same in both rising and falling markets.

27. The lower the R-squared, the better when trying to diversify; however, the higher the R-squared the better when using beta.

28. An advisor can rely on long-term returns and risk measurements when putting together a portfolio for a client who is about to retire, since the retirement period may last decades.

19


Module 3Modern Portfolio Theory


Module 3 True/False

1. Portfolios that offer the highest return for a given level of risk are “efficient.”

2. The efficient frontier contains all the combinations of risk and return that represent the same level of satisfaction.

3. Arbitrage is the act of buying a high-priced asset in one market and simultaneously selling it in another market at a lower price.

4. Arbitrage pricing theory is a multi-variable model that is used to explain security returns.

5. An efficient capital market assumes that a security cannot be overvalued or undervalued.

21

Module 3 True/False

6. The efficient market hypothesis assumes that an investor can outperform the market if the investor is efficient in gathering information about a company.

7. The efficient market hypothesis suggests that, over a period of time, an investor should earn a return that is consistent with the amount of risk the investor bears.

8. The weak form of the efficient market hypothesis suggests that current security prices reflect all historical security market information.

9. The strong form of the efficient market hypothesis suggests that stock prices reflect all public and private information.

22

Module 3 True/False

10. Empirical evidence tends to support the weak and semi-strong forms of the efficient market hypothesis.

11. The efficient market hypothesis implies that technical analysis should work.

12. An investor’s optimal portfolio would be where an investor’s indifference curve is tangent with the efficient frontier.

13. The major difference between the Capital Market Line (CML) and the Security Market Line (SML) is that the CML uses beta as its measure of risk, and the SML use standard deviation.

23

Module 3 True/False

14. The slope of the Security Market Line is determined by the Capital Asset Pricing Model (CAPM).

15. An underlying principal when calculating risk-adjusted return is that an investor should be rewarded with additional return when taking on additional risk.

16. The four primary factors in Arbitrage Pricing Theory are unexpected changes in inflation, GDP, market risk premiums, and taxes.

17. Overlap occurs when an investor owns certain securities in more than one mutual fund.

24

Module 3 True/False

18. Life cycle analysis has four major phases, and in order they are the accumulation phase, consolidation phase, spending phase, and gifting phase.

19. Monte Carlo is a type of value at risk (VAR) methodology.

20. Tactical asset allocation is a strategy by which the investor moves money into the areas of the market with the best predicted opportunities, and it often involves various forms of market timing.

21. A believer in the dividend yield anomaly would buy stocks with high dividend rates, and a believer in the neglected firm effect would avoid firms followed by few analysts.

25

Module 3 True/False

22. The size effect anomaly explains how small stocks tend to outperform large stocks over time, with approximately the same level of risk.

23. In a truly efficient market, a security could not be undervalued or overvalued.

24. Overconfidence and rationalization are two examples of investor behavior that can lead to underperformance.

25. Behavioral finance and the efficient market hypothesis work well together, in that both believe investors are rational.

26. The “random walk’ hypothesis states that security prices are randomly determined, so analysis is futile.

26


Module 4Common Stock Valuation & Performance Measurement


Module 4 True/False

1. The longer an individual is invested in the stock market, the more the individual’s investments are subject to drastic swings in the market.

2. An ex-dividend date is when a company announces a certain date in the future on which it will pay a specific dividend.

3. With a stock split, the book value per share changes, but the book value of the firm remains the same.

4. The risk/return trade-off in investments results from the fact that, generally, as an investor’s required rate of return increases, the amount of risk that must be taken also increases.

28

Module 4 True/False

5. An advantage to a firm that offers a dividend reinvestment plan is lower commissions.

6. An advantage to the investor in a dividend reinvestment plan is the automatic savings.

7. If a general price index rises more rapidly than an index of security prices, one could conclude that stockholders gain purchasing power.

8. Small company stock is more risky than long-term government bonds.

9. Long-term government bonds are less risky than intermediate-term government bonds.

29

Module 4 True/False

10. The Dow Jones Industrial Average (DJIA) is computed by adding the prices of one share of each of the 30 stocks included in the index and dividing the result by 30.

11. Two characteristics of the S&P 500 stock index are that it is a price-weighted index and that it tracks specific sectors of the stock market.

12. A higher dividend payout ratio implies a lower growth rate.

13. If an investor buys a stock on the ex-dividend date, that individual will receive the dividend.

14. Dividend reinvestment plans offer the advantage of deferring federal income taxes.

30

Module 4 True/False

15. If a firm retains earnings, total equity increases.

16. The PSR is an asset utilization ratio.

17. The S&P 500 stock index is more sensitive to changes in the prices of small stocks than to the stock prices of large companies.

18. The required return includes the risk-free rate and a risk premium.

19. The Treynor index assumes that portfolios are not well-diversified.

20. The intrinsic value of a preferred stock paying a $1.80 dividend with current interest rates at 6%, would be $30.00.

31

Module 4 True/False

21. When constructing an Investment Policy Statement, the return objective and risk tolerance of the client are mutually exclusive of each other.

22. The Sharpe ratio is a comparative measure, taking the excess return above the risk-free rate, and then dividing by standard deviation. The Sharpe ratio of one investment would be compared with another, with the higher ratio being chosen.

23. Alpha is an absolute measure, and is simply the difference between the return of the portfolio and the required return as calculated by CAPM.

32

Module 4 True/False

24. The purpose of an Investment Policy Statement includes defining the asset allocation policy and determining communication procedures.

25. The PEG ratio is the price to earnings ratio divided by the dividend growth rate.

33


Module 5Security Analysis


Module 5 True/False

1. A geometric average is calculated by adding the share prices and then dividing by the total number of prices.

2. A weighted-average return is calculated by weighting each investment return by its weight in the portfolio and adding together all weighted returns.

3. The S&P 500 is a price-weighted average; the DJIA is a value-weighted average.

4. The Value Line index includes a larger number of stocks than does the S&P 500 index.

5. A major weakness of a holding period return is that it fails to consider the timing of cash flows.

35

Module 5 True/False

6. When the annual rate of inflation is 8% and the annual nominal return is 10%, the inflation-adjusted return is 2%.

7. Most stock indexes, including the S&P 500 stock index, are value weighted.

8. Modern portfolio theory reinforced the use of the price-weighted method.

9. The geometric average return generally is higher than the arithmetic average return.

10. The dollar-weighted return is the preferred return to use when comparing the performances of two or more portfolio managers.

36

Module 5 True/False

11. Bottom-up analysis focuses on company analysis.

12. An increase in assets financed by equity increases the debt ratio.

13. Technical analysts use financial statements as the basis for making investment decisions.

14. In general, rising interest rates result in rising stock and bond prices.

15. High leverage in a profitable company results in a lower return on equity (ROE).

16. Given the following annual returns: +12%, +18%, - 7%, the geometric return is +7.12%.

37

Module 5 True/False

17. Beatrice purchases 100 shares of Lookout Industries at $60 per share using 50% margin. She sells the stock 7 months later for $72 per share. Ignoring interest charges, her holding period return was 20%.

18. Samuel purchases a painting for $5,000. At the end of the first year, he spends $1,200 on restoration; and at the end of the third year, he sells the painting for $8,000. His IRR was 9.48%.

19. The difference between the total present value of cash flows and the amount of the initial cash outlay (the cost of the investment) is called the net present value.

38

Module 5 True/False

20. If the net present value of a potential investment is negative or zero, it should be avoided; if it is positive, it should be purchased.

21. If all else remains equal, the impact of a company using debt instead of equity to raise capital will result in a higher return on equity.

22. Contrary opinion rules state that if too many investor advisors are bearish, the contrarian should be bullish.

23. Contrary investors looking at the put/call ratio will be bullish if the ratio of call options increases relative to put options.

39

Module 5 True/False

24. The general stages of the life cycle of a company are development, growth, expansion, maturity, and decline.

25. The D Group has assets of $350 million, and liabilities of $150 million. Current earnings are $25 million, so its return on equity is 12.5%.

26. The retention rate is the percentage of earnings paid out in dividends.

40


Module 6Features of Fixed-Income Securities


Module 6 True/False

1. Bonds are referred to as fixed-income securities because the amount to be received at maturity is a fixed amount.

2. Reinvestment risk is the risk that there will not be an opportunity to reinvest the coupon interest payments and the face value of a bond investment at an acceptable rate when these amounts are received.

3. Default risk is the risk that the issuer will fail to pay either the coupon interest payments or the face value of a bond when it is due.

42

Module 6 True/False

4. In general, the smaller the yield differences are between Treasury bonds and corporate bonds, the more attractive corporate bonds are because they do not have a risk of default.

5. Standard & Poor’s bond ratings BB through C indicate to a potential investor that bonds with these ratings are investment-grade bonds.

6. As a bond that is selling at a premium moves closer to maturity, it decreases in price and moves toward face value.

7. Before common dividends are paid in any given year, owners of cumulative preferred stock are paid any back dividends that might have been missed in previous years.

43

Module 6 True/False

8. Treasury notes and bonds pay coupon interest semiannually and are available through Federal Reserve banks or brokerage firms.

9. Interest income from Treasury securities is taxable as ordinary income at all levels—federal, state, and local.

10. The Treasury Direct System allows individual investors to purchase original-issue Treasury securities without going through a broker or financial institution (and thus paying a commission).

44

Module 6 True/False

11. General obligation bonds are issued by states, counties, cities, special districts, towns, and school districts, and they are backed by the issuer’s general taxing powers.

12. Full faith and credit general obligation municipal bonds are backed by pledged revenues from fees and charges that are accumulated outside the general fund of a municipality.

13. Municipal revenue bonds are issued to finance specific projects and are secured by revenues to be generated by the projects.

45

Module 6 True/False

14. Government National Mortgage Association securities (GNMAs) are called pass-through securities because funds invested in these securities go directly to homeowners for their mortgages.

15. Investors in GNMAs receive monthly payments containing only the interest paid on the mortgages held.

16. GNMAs are called self-liquidating investments because funds paid by homeowners are pooled to repay investors the principal amount at the end of the investment period.

46

Module 6 True/False

17. The governing document of a bond issue is the bond indenture, which is the contract between the trustee and the bondholders.

18. A difference between a term bond and a serial bond is the number of maturity dates under the original issue.

19. Interest earned on U.S. Treasury securities is exempt from federal taxes.

20. Convertible bonds have an embedded conversion option that allows the bonds to be converted into the issuer’s common stock.

47

Module 6 True/False

21. A nonrated bond means the bond has received a poor credit rating from the rating agencies.

22. Preferred stock is a hybrid security that has characteristics of both debt and equity.

23. The shorter the time period to the maturity of a bond, the greater the potential for price fluctuation.

24. A yield curve is a line plotted on a graph that shows, as of a given date and for a range of maturities, the yields on fixed-income securities of the same quality.

25. The yields on a yield curve are the coupon rates of the fixed-income securities being plotted.

48

Module 6 True/False

26. Two or more yield curves on a single graph show what has happened to interest rates over a period of time.

27. Yield curves can be used to predict whether trends will continue and when they will reverse.

28. A normal yield curve is one in which the yields on short-term securities are relatively low compared to the yields on long-term securities.

29. A yield curve is inverted when the yields on short-term securities are higher than the yields on long-term securities.

49

Module 6 True/False

30. When a yield curve is inverted, a financial planner should consider recommending short-term securities in order to lock in high rates.

31. A Yankee bond is a bond that is issued in the U.S. by a foreign company and denominated in U.S. dollars.

32. The principal amount on Treasury inflation-protection securities (TIPS) issued by the U.S. government is adjusted semi-annually for inflation, based on the CPI-U (All Urban Consumers) index.

50


Module 7Valuation & Analysis of Fixed-Income Investments


Module 7 True/False

1. An investor in a 28% marginal tax bracket who invests in tax-free municipal bonds yielding 10% would require a taxable equivalent yield of at least 13.89% on an investment in corporate bonds in order for the corporate bond to be more attractive.

2. The current price of a bond is the future value of the bond’s cash flow stream.

3. Duration is used to calculate the expected change in the price of a bond when interest rates change.

4. Duration is directly related to changes in the market and in coupon interest rates, and it is inversely related to changes in maturity.

52

Module 7 True/False

5. A bond’s systematic risk is reflected in the bond’s credit rating.

6. The face value of a bond divided by its conversion price is known as the conversion value.

7. An investment premium is the difference between the market value of a convertible bond and its conversion value.

8. The yield to maturity of a 7% coupon bond with 12 years until maturity and a current price of 980 is 7.14%.

9. If the current yield of a 7% coupon bond is 8%, then the bond must be selling at a premium.

53

Module 7 True/False

10. Bond X has a 9.5% coupon, 15 year maturity, and is callable in 10 years at a 5% premium. If the bond is currently trading at 990, the yield-to-call would be 9.96%.

11. If a bond is selling at a discount, yield-to-maturity will be greater than the yield-to-call.

12. If a bond is selling at a premium, the current yield will be greater than the yield-to-maturity.

13. An investor in the 33% marginal tax bracket should purchase an 8.5% corporate bond over a 5.75% municipal bond.

14. The yield-to-maturity on a bond with a current price of $1,035, a 5% coupon, 20-year maturity, and AAA rating, is 4.80%.

54

Module 7 True/False

15. When evaluating a premium bond, yield-to-maturity is the yield an investor should focus on, and yield-to-call is not relevant.

16. If an investment advisor anticipates that interest rates will be increasing for the foreseeable future, he or she would want to increase (lengthen) durations.

17. If an investor believes interest rates are going to fall, he or she would choose a 5% coupon bond with a 15-year maturity over a 8% coupon bond with a 15-year maturity.

18. As the coupon rate increases, duration will also increase.

55

Module 7 True/False

19. If interest rates are currently 9%, and your client is holding a zero coupon bond that matures in 17 years, the intrinsic value (present value) of the bond would be $224.

20. The duration of a zero coupon bond matches its maturity.

21. Straight bonds (bonds without any embedded options or call features) have a positive convexity, meaning that if interest rates go down, the bond will go up in price more than duration alone indicates.

56

Module 7 True/False

22. Credit ratings have a minimal impact on a company’s or municipality’s cost of issuing debt.

23. In a bullet portfolio, maturities are concentrated in the short- and long-term.

24. A substitution bond swap takes advantage of when bonds are temporarily mispriced.

25. If a convertible bond is currently trading at $1,100, has a conversion value of $1,020, and an investment value of $950, its downside risk is $80.

26. If a convertible bond has a conversion price of $45 per share, and the common stock is currently trading at $38 per share, the conversion value is $844.

57

Module 7 True/False

27. If a convertible bond is convertible into 35 shares, and the stock is currently trading at $45 per share, the conversion value is $1,285.

28. If interest rates are currently at 7% for comparable debt, the investment value of a convertible bond with a 6% coupon and 10-year maturity is $929.

29. If an investor’s time horizon is 15 years, then they should choose a 25-year bond with a duration of 14 over a 15-year bond with a duration of 9.

30. Immunization means matching an investor’s time horizon with the maturity of a bond.

58


Module 8Derivatives


Module 8 True/False

1. A put is an option that grants a buyer the right to purchase stock from an option writer at a specified price and within a specified time period.

2. Those who purchase calls are seeking profits that result from rising stock prices.

3. The exercise price is that price at which the owner of an option has the right to buy or sell the underlying stock.

4. In options quotations, the numbers listed under columns headed by names of months indicate the last trading price of puts and calls that were written on the listed stock.

60

Module 8 True/False

5. Warrants, just like call options, usually expire within one year.

6. The maintenance margin in futures contracts is the amount the investor must maintain with the broker; and if an investor’s equity falls below this amount, then funds must be deposited to bring the equity back up to at least the maintenance amount.

7. Delivery is the typical method of settling a futures contract.

8. Speculators in futures markets buy or sell contracts to reduce the risk of adverse price fluctuations.

61

Module 8 True/False

9. Investors who are concerned about unfavorable short-term market prospects, but who remain bullish for the long run, can protect themselves by selling stock index futures.

10. Futures contracts are an obligation to buy or sell; they are different from options, which give individuals a right (but not an obligation) to buy or sell.

11. To guard against a price decrease, someone who is long in a commodity would use a long hedge position as well.

12. Buyers, not sellers, need to meet margin requirements.

62

Module 8 True/False

13. Options can be used as portfolio insurance to limit a portfolio’s exposure to a market decline.

14. If you expect the S&P index to fall, you would sell stock index futures.

15. All futures positions are taxed at year-end as closed positions.

16. Income-oriented investors can earn additional income by writing options that are purchased by speculators.

17. A profitable call is “in the money.”

18. Any premium above and beyond the intrinsic value is time value.

63

Module 8 True/False

19. Futures investors must pay a premium for each futures contract they purchase.

20. The essence of the commodity futures markets is its use for speculation.

21. If a client is concerned about the market declining in the short run, but does not want to sell their positions, a possible solution is to buy protective puts.

22. Hedging is simply taking the opposite position of what you have (or don’t have). If you are long a commodity, to hedge you would short the futures; and if you are short a commodity, you would buy (go long) the futures.

64

Module 8 True/False

23. A jeweler needing gold in the future would be short gold. To hedge against falling prices, he or she could buy (go long) gold futures.

24. A gold mine would be long gold. To hedge against falling prices, the mine could enter into a short hedge.

25. A collar is a strategy one can use when long on a stock. It involves selling covered calls with a strike price above the current price of the stock, and then taking the premium received from selling the calls to purchase puts with a strike price below the current price of the stock.

65

Module 8 True/False

26. As an option approaches its expiration date, the time premium of the option will decline.

27. If a stock is trading at $48, and an investor holds a $50 call option, the option is “in-the-money.”

28. If a stock is trading at $37, and an investor holds a $40 put option, the option is “in-the-money.”

29. Futures, unlike credit default swaps, are not a type of derivative.

30. Futures contracts are available on commodities, financials, greenhouse gases, and temperature changes.

66


Module 9Real Assets & Foreign Investments


Module 9 True/False

1. The four major types of real estate are industrial, commercial, residential, and land.

2. A disadvantage of direct investing in real estate is the inherent management responsibility.

3. A due-on-sale clause in a mortgage bond means that when the property is sold, the lender has a right to call in the remainder of the mortgage and renegotiate contract terms with the new buyer.

4. Foreclosure is described best as occurring when the payments set forth in the mortgage agreement are not made or when any of the covenants are not upheld by the mortgagor.

68

Module 9 True/False

5. The various forms of real estate ownership include outright ownership, joint ventures, and limited partnerships.

6. Real estate limited partnerships (RELPs) provide limited liability, but marketability may be an issue.

7. Qualities to look for in a dealer of bullion or bullion coins include financing fees, sales commissions, and other fees.

8. In terms of investment potential, the main difference between gold and assets such as real estate, art, and antiques is that, as a precious metal, gold is very marketable.

69

Module 9 True/False

9. Collectibles are bought and sold in organized markets such as the New York Stock Exchange.

10. Anticipation of inflation is an important reason for investing in collectibles.

11. Gold’s general acceptability potentially makes it a good store of value.

12. Most REITs retain their earnings in order to expand.

13. In a period of falling interest rates, a mortgage REIT is a good investment.

14. While rental properties may operate at a loss, they may produce a positive cash flow.

70

Module 9 True/False

15. Dividends distributed to REIT shareholders are eligible for the preferential long-term capital gains rate.

16. REMICs (Real estate mortgage investment conduits) are similar in many ways to a mortgage REIT, except that principal and interest payments are structured into separately traded securities classes.

17. An investor should purchase property being offered for $3,800,000 if the net operating income of the property is $310,000, and the capitalization rate for similar properties is 8%.

71

Module 9 True/False

18. An investor should purchase property being offered for $1,200,000 if the predicted gross rental income is $125,000 and the GIM is 8.6.

19. The net operating income of a property with $110,000 of rental income, 5% vacancy allowance, $35,000 of operating expenses, and $12,000 of mortgage payments is $57,500.

20. The two general classes of international funds are developed country funds and emerging market funds.

21. Emerging markets are not a good diversifier, since they have a high correlation to U.S. markets.

72

Module 9 True/False

22. Investors can avoid currency risk by investing in ADRs.

23. All else being equal, in order to make a profit, the home currency needs to go up in value, and the foreign currency needs to go down in value.

24. If the current exchange rate is $1.54 U.S. for each euro, then this would mean that one euro purchases 0.65 U.S. dollars.

25. ETFs are offered for many different individual countries.

26. The vast majority of REITs are equity REITs.

73


Module 10Mutual Funds & Other Investments


Module 10 True/False

1. A unit investment trust holds a fixed pool of securities; because the pool is almost always kept unchanged, the need for active management is eliminated.

2. Investment companies must maintain a minimum level of diversification, which requires them to have at least 85% of a fund’s total assets invested and to have not more than 10% of a fund’s total assets invested in one company.

3. One difference between open-end and closed-end investment companies is that shares of open-end companies sell for net asset value (NAV), while shares of closed-end companies sell at a discount or a premium.

75


4. Investment companies provide professional management, contain diversified portfolios having specific investment objectives, and offer investors an opportunity to participate with a relatively small financial outlay.

5. Administrative fees charged to participants in investment company funds are used for marketing and distributing fund shares.

6. An investment company custodian purchases fund shares for resale to brokers, selling groups, or plan companies, or for direct resale to investors.

7. An automatic dividend reinvestment plan is one in which earnings are immediately used to purchase additional shares of the fund.

76


8. Income mutual funds are characterized by a fixed portfolio of municipal bonds that can be traded in a secondary market and that provide monthly income to the investor.

9. Growth mutual funds are characterized as having the greatest market risk because they contain speculative securities of small companies and securities of companies that have fallen on bad times.

10. Balanced mutual funds are characterized by a proportional weighting of income and growth securities and include stocks, bonds, and money market instruments.

77


11. A major advantage of money market mutual funds is safety of principal, which is due to the short-term maturities and the diversification in types of securities, issuers, and maturities.

12. The return on money market mutual funds results from an increase in net asset value during an investor’s holding period.

13. Interest rate risk is a major type of systematic risk in bond funds.

14. A target-date fund becomes more conservative in its asset allocation over time.

15. Mortgage-backed securities pay both interest and principal monthly.

78


16. U.S. Treasury debt is free of both interest rate risk and default risk.

17. Index funds are designed for investors who want their investments to outperform the market.

18. Closed-end funds continuously sell new shares and redeem shares from holders.

19. A Yankee certificate of deposit is a short-term, unsecured IOU of a U.S. corporation.

20. In a dollar-cost-averaging approach, an equal number of dollars are invested in a fund at each investment period.

79


21. Many academic studies have confirmed that past fund performance is a reliable predictor of future performance.

22. Aggressive stock funds with low portfolio turnover tend to have high capital gains distributions.

23. International funds invest in both U.S. and foreign securities.

24. Hedge funds strive for risk-adjusted returns as measured against the appropriate benchmark.

25. One advantage of separately managed accounts is the ability to implement tax planning.

80


26. If a formula uses beta, it is important that the coefficient of determination be low, indicating a high level of systematic risk.

27. A negative alpha for a fund means that the performance of the fund has been negative.

28. Fund size can be an advantage for a bond fund.

29. If an investor believes that interest rates are going to be in an uptrend for the next few years, he or she should invest in bonds with lower durations.

30. Closed-end funds often sell at a premium.

81


31. Hedge funds often have a “lock-up period” of one year or longer.

32. ETFs tend to have lower fees than mutual funds, but both ETFs and mutual funds have comparable taxable distributions at the end of the year.

82


CFP 2True/False QuestionsEnd of slides


©2015, college for financial planning, all rights reserved. cfp 2 true/false questions certified...

Documents

financial planning

financial products

economic cycle

registered investment

securities act

securities laws

economic growth

investment purposes