A stock is currently worth $75. If the stock was purchased one year ago for $60, and the stock paid a $1.50 dividend over the course of the year, what is
... [Show More] the holding period return?
A)
22.0%
B)
27.5%
C)
24.0%
D)
25.0%
B
*(75 − 60 + 1.50) ÷ 60 = 0.2750, or 27.5%.
A client purchased a security for $60 and sold it 1 year later for $59. If he received 4 quarterly dividends of $0.50 each during the period, his total percentage return would be
A)
3.30%
B)
0%
C)
1.67%
D)
2%
C
*The total return on an investment is the sum of the capital gains/losses plus any income distribution such as dividends or interest. In this case, the client had a capital loss of $1 ($60 − $59 = $1), which was offset by $2 (4 × $0.50 = $2) in dividend distributions for a total dollar return of $1. In percentage terms, the return is calculated by dividing the dollar return amount by the total invested or $1 divided by $60 = 1.67%.
On June 20, 2016, an investor in the 30% marginal federal tax bracket acquired a growth stock paying no dividend for $10 per share. On June 22, 2017, the investor sold the stock for $20 per share. Presuming capital gains rates are 15%, the investor's after-tax rate of return is closest to
A)
70%
B)
100%
C)
200%
D)
85%
D
*Although the stock grew at a 100% rate of return (by doubling), the investor must pay capital gains tax on the investment at 15%, and the investor realizes an after-tax rate of return of approximately 85%. Because the investor held the stock for more than 1 year, the sale is taxed at a favorable capital gains rate rather than at the investor's ordinary income tax rate.
One of the important roles of an investment adviser representative is assisting clients in analyzing the performance of securities held in their portfolios. Which of the following is the best measurement of a security's performance?
A)
Total return
B)
Standard deviation
C)
Beta
D)
Yield
A
*Total return reflects the entirety of a security's performance because it includes both income and capital appreciation. Beta and standard deviation are risk measurements, and while they may be used to evaluate a security's performance when compared to the risk taken, they don't truly provide a measurement as does total return.
An investor purchases a 5% callable convertible subordinated debenture at par. Exactly one year later, the bond is called at $104. The investor's total return is
A)
9%.
B)
5%.
C)
4%.
D)
7.5%.
A
*Total return consists of income plus gain. Buying a bond at par and having it called at $104 results in a $40 gain. With a 5% coupon, there will be two semiannual interest payments of $25 in a one-year holding period. Adding the $40 + $50 = $90 total return on an investment of $1,000 which = 9%.
During the past year, the market price of Kapco common stock has increased from $47 to $50 per share. Over that period, Kapco's earnings per share (EPS) have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, the current yield on Kapco common stock is
A)
4.26%
B)
2.13%
C)
2%
D)
6.34%
C
*The current yield on a stock is computed by dividing the annual dividend rate by the current market price. With EPS of $2.50 and a 40% payout ratio, the annual dividend is $1.00. This dollar divided by the current market price of $50.00 results in a current return of 2%.
When an investor's original value is subtracted from the ending value, and then has the income received over that time period added to it, which is then divided by the original cost, the result is
A)
internal rate of return
B)
annualized return
C)
expected return
D)
holding period return
D
*This is the method of computing holding period return.
An investment is made of $10,000. At the end of the year, $500 in nonqualifying dividends has been received and the value of the investment is $10,500. If the investor is in the 30% tax bracket, the after-tax yield is
A)
3.5%
B)
6.5%
C)
8.5%
D)
5.0%
A
*The only return (as far as yield is concerned) is the $500 of dividends. Remember, nonqualifying dividends do not "qualify" for the 15% rate. Subtracting 30% for taxes leaves $350 which, when divided by the $10,000 initial cost, is an after-tax yield of 3.5%. If the question had asked about total return, then the $500 unrealized profit would have been included, although there would have been no tax on it.
During your annual review with a client, you go over all the year's transactions. The beginning of the year balance in the account was $3,000. The client purchased 100 shares of ABC on February 1 at $30 per share and sold it on June 1 at $33 per share. During that period, ABC paid 1 quarterly dividend of $.30. The client used the proceeds of the ABC sale to purchase 66 shares of DEF on June 15 at $50 per share and sold it on December 15 at $60 per share. DEF pays quarterly dividends of $0.25 on the 1st of each month on a cycle beginning with February. Based on this information, you would inform the client that the account's total return is
A)
34.10%
B)
102.70%
C)
46%
D)
100%
A
*Total return in an account is computed by taking all income plus capital gains and dividing that by the original investment. In this example, the client received a $0.30 dividend on 100 shares ($30) and two $0.25 dividends (August 1 and November 1) on 66 shares ($33). Add that $63 of income to the gain of $300 on the first transaction, and $660 on the second, to come up with a total of $1,023 divided by $3,000, which equals a total return of 34.1%.
If an agent recommends that a client invest a portion of his portfolio in an international stock fund and is asked whether she should compare the performance of the fund against the S&P 500 Index, how should the agent respond?
A)
There is no appropriate benchmark against which an investor can compare a portfolio of foreign securities.
B)
No, it is preferable to compare the fund against the Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index because it covers international securities.
C)
No, it is preferable to compare the fund against the Russell 2,000 Index because it covers smaller corporation stocks.
D)
Yes, the S&P 500 is an appropriate benchmark against which to compare the performance of all equity funds.
B
*It is important that a particular mutual fund be compared against the appropriate benchmark. An international fund's performance should be compared against an index of foreign stocks such as the Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index.
If you knew a given stock had a 40% chance of earning a 10% return, a 40% chance of earning −20%, and a 20% chance of earning −10%, the expected return would be equal to
A)
−6%
B)
10%
C)
−10%
D)
14%
A
*The expected return is computed by taking the probability of each possible return outcome, multiplying it by the return outcome itself, and then adding them all together. In this case, the math is as follows: (0.4 × 10%) + (0.4 × −20%) + (0.2 × −10%), or +4% − 8% − 2%, which equals -6%. Part of the trick here is catching the probable negative returns and the ridiculous assumption that an investor would consider looking at a stock with this kind of expected return. You can always count on NASAA to surprise you.
If the return on Treasury bills is 3% and the equity risk premium is 4%, the expected equity returns should be
A)
7%
B)
1%
C)
12%
D)
4%
A
*The expected return on an equity investment is the risk-free (for example, T-bill) rate of return added to the equity risk premium (3% + 4% = 7%).
This is the performance of your portfolio over the previous 4 years:
-Year 1 - 10%
-Year 2 - 45%
-Year 3 + 20%
-Year 4 + 35%
In order for the portfolio to be equal to the starting investment, the return in Year 5 must be nearest to
A)
33%.
B)
25%.
C)
0%.
D)
20%.
*
-In Year 1, you lose 10%. Your portfolio is now worth $1,000 x (1 - 0.1) = $1,000 x 0.9 = $900.
-In Year 2, you lose 45%. Your portfolio is now worth $900 x (1 - 0.45) = $900 x 0.55 = $495.
-In Year 3, you gain 20%. Your portfolio is now worth $495 x (1 + 0.2) = $495 x 1.2 = $594.
-In Year 4, you gain 35%. Your portfolio is now worth $594 x (1 + 0.35) = $594 x 1.35 = $801.9.
-You would like to know by how much your portfolio needs to appreciate in Year 5 to be worth its original value of $1,000. Let's set "y" to be this number. Then we have:
-$801.9 x (1 + y) = $1,000. Solving this equation for "y" gives: y = ($1,000 ÷ $801.9) - 1 = 0.247 = 24.7%.
Rounding this answer in percentage terms (24.7%) to the nearest integer yields the desired answer of 25%. -Your portfolio thus needs to increase by nearly 25% in Year 5 for it to be worth its original value of $1,000.
-Some might find it easier to look at the shortfall ($1,000 - $801.90) = $198.10. Divide that by the current value and you have 198.10 ÷ 801.90 = 24.7%.
-Some might just look at the number and recognize that you are about $200 short on a value of $800 and that is 25%.
Bill will put money into stocks only if he expects that stock returns, over time, will outpace bond returns by some amount that compensates him for the added volatility of owning stocks. This reflects
A)
premium priced bonds
B)
option premium
C)
risk premium
D)
time premium
C
*Investors will put money into stocks only if they expect that stock returns, over time, will outpace bond returns by some amount that compensates them for the added risk of owning stocks. This extra return from stocks is known as risk premium-literally, the premium an investor receives in exchange for owning a riskier, more volatile instrument.
An investor purchased stock for $50 per share at the beginning of the year. In December, the investor liquidated his stock for $55 per share, while also receiving dividends of $2 per share during the year. Assuming an inflation rate of 3%, what is the investor's real rate of return?
A)
4%
B)
11%
C)
10%
D)
14%
B
*Given the fact the client liquidated his shares at a price of $55, we can conclude that he attained a 10% ($5 profit ÷ $50 initial investment) return based on capital appreciation of the stock. He also received dividends of $2 per share giving him an additional return of 4% ($2 ÷ $50). By adding these 2 percentages together, we can conclude that his total return is 14%, less an inflation rate of 3%, which would give a real rate of return of 11%. [Show Less]