AAMS Practice Exam - Questions and Answers

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AAMS Practice Exam - Questions and Answers An employer plans to use corporate-owned life insurance to informally fund a nonqualified deferred compensation agreement and wants flexibility regarding i... nvestment choices. Which one of the following types of life insurance should this employer choose? Variable life insurance The latest economic reports have been gloomy, and the stock market is in a protracted slump. Most of your regular stock customers are selling out their positions. A new client, Mr. Jones, sees these conditions as a buying opportunity. You would define his investment personality as Contrarian As of December 31, 20X1, Bob Larkin has the following financial data: Bond fund $17,000 Residence$400,000 Vested 401(k) plan$95,000 Auto notes$16,000 Residence mortgage$285,000 Auto payments$7,000 Automobiles$45,000 Checking account$8,000 Utilities$4,000 CD$15,000 Stock$125,000 Home equity loan$40,000 What is Bob's net worth? $364,000 Assets = $17,000 + $400,000 + $95,000 +$45,000 + $8,000 + $15,000 + $125,000 = $705,000. Liabilities = $16,000 + $285,000 + $40,000 = $341,000, so net worth is $364,000. Notice that auto notes of $16,000 are included in this calculation, but auto payments of $7,000 is a cash flow item and therefore not included. For the year ending December 31, 20X2, Ted Jones has the following financial information: Salaries$70,000 Auto payments$5,000 Insurance$3,800 Food$8,000 Credit card balance$10,000 Dividends$1,100 Utilities$3,500 Mortgage payments$14,000 Taxes$13,000 Clothing$9,000 Interest income$2,100 Checking account$4,000 Vacations$8,400 Donations$5,800 What is the surplus or (deficit) for Ted? $2,700 Income = $70,000 + $1,100 + $2,100 = $73,200. Expenses = $5,000 + $3,800 + $8,000 + $3,500 + $14,000 + $13,000 + $9,000 + $8,400 + $5,800 = $70,500, so there is a surplus of $2,700 Which one of the following statements comparing the suitability and fiduciary standards is correct? Legally, suitability disputes are often resolved in arbitration whereas fiduciary disputes are ultimately resolved in the courts. Which one of the following types of distributions from a qualified retirement plan may be subject to mandatory 20% withholding? indirect rollover Which one of the following statements regarding a qualified plan is correct? The employer's deduction is available in the year that a contribution is made. All of the following should be agreed upon between the client and the investment professional when making recommendations based on an investment policy statement EXCEPT specific investments. Which of the following has a direct bearing on which investments are appropriate for achieving a goal? the investor's time horizon One purpose of an investment policy statement is to provide guidelines around which the portfolio is to be constructed and managed. Which of the following are elements of any investment policy statement? I. the client's investment goal II. suitable and unsuitable investment vehicles III. an acceptable risk level IV. a provision for periodic review I, II, III, and IV As the investment policy statement formulation moves to policy implementation, the investment professional takes a leading role. An investor notices that technology stocks are in a strong bull market and wants to take advantage of it. Even though valuations are at record high levels, he buys a technology stock that a brokerage firm is recommending. Which one of the following is the investor demonstrating? Rationalization One change in a client's situation that would require an adjustment in the asset management process would be a sudden early retirement from employment. Dan has bonds maturing in two weeks. Since he bought the bonds, interest rates have fallen. Dan's bonds are most likely subject to which one of the following risks? reinvestment risk Jim Wilson has a $20,000 portfolio of four different stocks. The distribution of this capital and the betas of these stocks are shown below. % of Portfolio Value/ Beta Stock A 10% 1.10 Stock B 20% 1.15 Stock C 30% 1.30 Stock D 40% 1.25 What is the weighted-average beta of Jim's stock portfolio? 1.23 The risk-free rate is 3%, the market rate of return is 10%, the standard deviation of XYZ stock is 20, and the beta of XYZ stock is 1.40. Given this information, and using the capital asset pricing model, what is the expected return of XYZ stock? 12.80% Assume the following asset classes have the correlations to long-term corporate bonds shown below: Treasury bills: .01 Gold: -.25 Large stocks: .31 Small stocks: .26 Which one of the following provides the most diversification benefit to a portfolio consisting of long-term corporate bonds? Gold Nancy has $10,000 to invest at the beginning of each of five years, at a fixed annual rate of 8%. How much will her money be worth in five years? $63,359 An investor who would like to know how a portfolio manager performed relative to how the manager was expected to perform on a risk-adjusted basis would use which one of the following indicators? Jensen's alpha Asset allocation can best be defined as the process of distributing portfolio investments among various investment categories. Based on historic performance data in the course, which class of assets has provided the greatest pretax total return since 1926? small-cap stocks Investment professional Ted Conway has just received the latest long-term total return data for different asset classes. He sees that common stocks returned 10% compounded with a standard deviation of 14.0; T-bills turned in a 4% return with a standard deviation of 3.0. What is the expected return of a portfolio of 80% stocks and 20% T-bills? (.80 x .10) + (.20 x .04) = .08 + .008 = 8.8% Which one of the following is a characteristic of mortgage-backed securities? Quoted yields are based upon anticipated prepayments of the underlying mortgages. According to research reports from your firm, CodeHead Software's earnings for this year are estimated to be $2.00 and next year are estimated to be $2.25 per share. The current P/E ratio of similar software vendors is 15, but CodeHead typically sells at a 10% premium to these other vendors. What stock price would you estimate for CodeHead next year? It sells at a 10% premium so the P/E of the industry, 15, has to be increased by 10%. 10% of 15 = 1.5, which added to 15 = 16.5. Then taking next year's earnings of $2.25 × 16.5 = $37.125 or $37.13. Henry owns a 10-year bond with a coupon rate of 4.85% (paid semiannually). If the comparable yield for this quality bond is currently 5.5%, what should be the intrinsic value of his bond? A) $930.51 B) $847.03 C) $950.51 D) $929.67 Which of these correctly lists characteristics of the downturn period of a business cycle? falling interest rates, increased unemployment, lower lending activities Tactical asset allocation is utilized to move assets from those that appear overvalued to those that appear undervalued. The relationship between investment strategy and investment policy is one in which investment strategy is compliant with the investment policy. [Show More]

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