CSC 2- Practice Exam 2
Q&A 2023 Update
1. Calculate what forecast might be made for the share price of BIB Inc. if projected
earnings are $4 per share
... [Show More] and the company has historically traded at a P/E of 20 during
similar economic periods, which is similar to the P/E of BIB's industry. - Answer: $80
The P/E can be used to forecast a future price of a stock. In this example, if BIB has
traded at a P/E ratio of about 20 during a similar economic period, further confirmed by
the P/E of the industry, and the company should earn $4.00 per share over the next
year, the stock should be priced at $80 ($4 × 20 = $80).
2. What is the underlying structure of an inverse leveraged ETF? - Answer: Derivatives
An inverse leveraged ETF makes use of derivatives (typically swap contracts).
3. What makes a technical analyst's ability to predict market movements most
challenging? - Answer: Mass investor psychology
In times of uncertainty, factors that cannot be predicted by the use of technical analysis,
such as mass investor psychology that may cause investors to act irrationally, can also
affect market prices. This can make the technical analyst's job much more difficult.
4. Your research department has provided you with a Return Expectation of the Major
Asset Classes as follows:
Cash and equivalents: in= 2.75% Max 4.25%
Fixed-Income: Min= 2.2% Max 8.75%
Equities: Min= -10% Max 4.25%
Your client has a $200,000 portfolio, invested 10% in cash, 25% in fixed-income and
65% in equities. What is the minimum and maximum expected percentage return on his
portfolio? - Answer: -5.7% to 18.9%
First, you must determine the amount attributable to each of the asset classes. 10% =
20,000; 25% = $50,000; 65% = $130,000. The minimum and maximum expected return
for each class would be:
Cash- $20,000 (Min=2.75%=$550) (Max=4.25%=$850)
Fixed Income- $50,000 (Min:2.25%=$1,125) (Max:8.75%=$4,375)
Equities- $130,000 (Min:-10%=$13,000) (Max: 25%=$32,500)
Total Min= -$11,325 Total Max= $37,735
Percentage: Min=-5.7% Max= 18.9%
5. What is the name for a bundled package of equity trade-related services offered by
investment dealers to special clients such as hedge fund managers? - Answer: Prime
brokerage
Prime brokerage is a bundling of equity trading-related services used primarily by hedge
funds.
6. What correctly identifies the order of different mutual fund types from lowest to
highest risk?
1. Equity funds.
2. Specialty funds.
3. Balanced funds.
4. Money market.
5. Fixed income funds. - Answer: 4, 5, 3, 1, 2
Risk and return can be seen as a scale with the lowest risk/lowest return funds
category being money market funds and the highest risk/highest return funds category
generally being specialty funds. Within that range there are (lower to higher risk) fixedincome funds, balanced funds, equity funds
7. You overhear the following conversation between an Ontario licensed mutual fund
salesperson and his Ontario resident client: "If you purchase XYZ mutual fund shares
today you'll get the price at today's close. If you decide to sell them later, the mutual
fund will definitely buy them back. If you're not ready to do the trade today, call me
tomorrow and we'll give you today's closing price." What unacceptable sales practice
has been exhibited within this conversation? - Answer: Backdating purchase orders
The sole unacceptable sales practice here is found in the final statement, "If you're not
ready to do the trade today..." It is unlawful for a salesperson to backdate an order in an
attempt to buy shares or units at a previous day's price. Otherwise, all of the statements
are accurate and acceptable. The salesperson states that the fund will buy back the
securities, which is an explanation of the right of redemption that applies to all mutual
funds. He correctly identifies what price the investor will receive if he purchases the
shares today, but does not guarantee a specific price.
8. CCK stock closed at the following prices during the course of the last trading week:
Monday - $15.50
Tuesday - $18.00
Wednesday - $18.25
Thursday - $17.50
Friday - $17.75
What is CCK's 5-day moving average as of the close of trading on Friday? - Answer:
$17.40
A moving average is simply the sum of the closing prices divided by the number of
closing prices. In this case, the closing prices for the five trading days sum to $87
9. An investor sells 300 shares of PQR Company, with an adjusted cost base (ACB) of
$6,000, for net proceeds of $4,500. Two weeks later, the investor purchases 300 shares
of PQR Company for $5,000. The investor continues to hold the shares 30 days later. In
which of the following ways will the loss on the disposition of the shares be reported for
income tax purposes?
a) Canada Revenue Agency will not allow the investor to report a capital loss.
b) The investor will report a capital loss of $1,000.
c) The investor will report a capital loss of $1,500.
d) The investor will report a capital loss of $500. - Answer: a) Canada Revenue Agency
will not allow the investor to report a capital loss
Taken together, these transactions are an example of a superficial loss. Superficial
losses are not tax-deductible. They occur when securities sold at a loss are
repurchased within 30 calendar days before or after the sale and are still held at the end
of 30 days after the sale. The amount of the superficial loss - $1,500 in the example
above - is added to the cost base (book value) of the repurchased shares.
10. What industry would be most appropriate to include in the investment portfolio of a
risk-averse investor during a recession?
1. Forest products industry.
2. Banking industry.
3. Utility industry.
4. Wireless technology industry. - Answer: Banking industry and Utility industry
During a recession, industries that are considered to be defensive typically outperform
cyclical or speculative industries. In this question, the banking and utility industries are
considered to be defensive; forest products are considered to be cyclical, and the
wireless technology industry an emerging or speculative industry.
11. Which fiscal policy action might a government take specifically to protect the
domestic shoe manufacturing industry - Answer: Increased in import tariffs
Fiscal policy can affect the economy broadly and also specific industries narrowly. In
this example, the government wishes to protect a specific industry, which would indicate
a targeted initiative. While increases in spending, reduction on sales tax, and reduction
in personal income tax would tend to encourage purchases in the economy as a whole,
the utilization of import tariffs would focus specifically on the goal of protecting the
domestic shoe industry.
12. An investor believes that the securities markets are efficient, and at all times reflect
all relevant information on expected return and risk. Based on this view, which fund best
suits this investor? - Answer: An index fund
Managers using a passive investment strategy tend to replicate the performance of a
specific market index without trying to beat it. They believe that securities markets are
efficient - that is, securities prices at all times reflect all relevant information on expected
return and risk. The passive portfolio manager does not believe that it is possible to
identify stocks as underpriced or overpriced, at least to an extent that would achieve
enough extra return to cover the added transactions costs
13. What do you call the verification process of matching security buy and sell trade
orders between two institutional firms? - Answer: Clearing
Clearing is the process of confirming and matching security trade details.
14. Based on the dividend discount model, what is the approximate intrinsic value of
Glacier Energy if its expected dividend in one year is $1.20, the discount rate is 6.30%,
and its long-term growth is expected to be continuous at 3.60%? - Answer: $44.44
The formula is Price = Div1 / (r-g). Div1 is the expected dividend paid out by the
company in one year, r is the required rate of return on investments, and g is the
assumed constant growth rate for dividends. Therefore, the price or intrinsic value of
Glacier Energy = $1.20 / (.0630 - .0360) which equals $44.44
15. What is the difference between the return on the underlying reference asset and the
return on the ETF? - Answer: Tracking error
Tracking error measures the ETF's performance relative to its index.
16. Identify the features of exchange-traded funds (ETFs) that make them attractive
from the perspective of the retail investor.
1. Transparent.
2. Liquid.
3. Tax efficient.
4. Customizable. - Answer: Transparent, Liquid, and Tax efficient
Exchange-traded funds are transparent and liquid investments that are considered to be
tax efficient. ETF's are not customizable from the retail investor's perspective.
17. Last year, an investor earned a 5% real rate of return on his portfolio. If inflation last
year was 3%, what was the approximate nominal rate of return on his portfolio? -
Answer: 8%
The approximate real rate of return on a security or portfolio of securities is equal to the
nominal rate of return minus the inflation rate. Thus, given the real rate of return and the
inflation rate, the approximate nominal rate of return is equal to the real rate of return
plus the inflation rate.
18. Select the most accurate statements concerning the cash flow/total debt outstanding
ratio.
1. This ratio gauges a company's ability to repay all the funds it has borrowed.
2. A relatively high ratio of cash flow to total debt outstanding is considered positive.
3. This ratio measures a company's ability to pay interest charges on its debt.
4. This ratio shows the net tangible assets of a company available to cover the total
debt outstanding. - Answer: This ratio gauges a company's ability to repay all the funds
it has borrowed and a relatively high ratio of cash flow to total debt outstanding is
considered positive.
The cash flow/total debt outstanding ratio gauges a company's ability to repay all the
funds it has borrowed.
19. What security trades as an exchange-traded structured product? - Answer: Split
shares
A split share is a security that has been created by a corporation (usually an investment
trust) to divide (or split) the investment attributes of an underlying portfolio of common
shares into separate components that satisfy different investment objectives. The
shares created by the split share corporation are listed and trade on a stock exchange
20. An investor purchased $50,000 of a segregated fund with a 100% guaranteed death
benefit and a 75% maturity guarantee. Nine years later, the investor died when the
market value of the fund was $45,000. Assuming that no deposits, withdrawals, or
resets have been made, calculate the amount of death benefit the beneficiary will
receive. - Answer: $5,000
The amount of the death benefit is equal to the difference, if any, between the
guaranteed amount and the net asset value of the fund at death. $50,000 - $45,000 =
$5,000.
21. If a portfolio manager anticipates a decrease in the general level of interest rates,
which of the following strategies will she most likely pursue?
1. Extend the average term on bond investments held.
2. Shift long-term bonds to common equity.
3. Increase the duration of the portfolio.
4. Convert long-term bonds to short-term bonds. - Answer: Extend the average term on
bond investments held and increase the duration of the portfolio
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