Certified Financial Planner Investment Planning

1.Nora bought one share of a shipping company for $40. During the year the company paid her a $2 dividend, and she then sold the share for $46. What is her holding-period return?

2.Owen's taxable brokerage fund returned 10 percent in the first year and 20 percent in the second year. He wants the simple average of those two yearly returns, with each year counted once. What is that arithmetic mean?

3.Quentin's portfolio rose 100 percent in year one and then fell 50 percent in year two. He had no deposits or withdrawals. What is the geometric mean of those two yearly returns?

4.Renee paid $1,000 for a corporate bond, collected $40 of coupons during the year, and sold the bond for $970. What is her holding-period return?

5.Sam's college fund returned 8 percent one year and 32 percent the next year. He asks which average treats the two years equally without compounding. Which statement is correct?

6.Talia paid $25 for a share of a bakery chain, received no dividend, and sold the share a year later for $30. What is her holding-period return?

7.Uma's savings fund returned 0 percent in a flat year and 21 percent the next year. She wants the compound average of those two years. What is the geometric mean?

8.Victor is summarizing two past yearly returns, 12 percent and 4 percent. He wants each year weighted equally and he does not want compounding. Which number should he report?

9.Wendy put $200 into a money-market mutual fund. One year later the account was worth $220. She added nothing and withdrew nothing. What is the holding-period return for that year?

10.Xavier earns 8 percent interest on a taxable bank certificate, and the interest is taxed at 25 percent. What after-tax return does he keep?

11.Yolanda's bond fund returned 10 percent while consumer prices rose 4 percent. She computes the real return as one plus the return, divided by one plus inflation, then minus one. To the nearest tenth of a percent, what is that real return?

12.Zane's stock fund returned 12 percent, and his tax rate on that return is 20 percent. What after-tax return does he keep?

13.Alicia's savings bond earned 9 percent in a year when the prices she pays rose 2 percent. She wants the rough real return found by subtracting inflation from the nominal return. What does she get?

14.Ben receives 5 percent fully taxable interest and pays tax at 40 percent on that interest. What is his after-tax return?

15.Clara earned 10 percent, pays tax at 30 percent on that return, and inflation was 2 percent. She first computes the after-tax return, then subtracts inflation. What figure does she get?

16.Derek earned 21 percent on a rental partnership while inflation was 10 percent. He computes the real return as 1.21 divided by 1.10, then minus 1. What is that real return?

17.Elena sold a mutual fund that had returned 16 percent before tax. Her tax rate on that return is 25 percent. What is the after-tax return?

18.Felix is explaining a Treasury bill to his son. The bill earned 6 percent, and the inflation figure he read was 1 percent. If he approximates the real return by subtracting those rates, which statement is right?

19.Gina owns stock in one local grocery. A strike closes that single store for a month, and the rest of the market is calm. What kind of risk is the strike, and what can a broad portfolio do about it?

20.Hugo's fund has a beta of 1.2 against the market index named in his plan. If that index rises 10 percent, what market-related move does the beta imply for the fund?

21.Iris holds a broad stock fund. A recession cuts revenue at nearly every listed company at the same time. Which description fits that risk?

22.Jamal's fund had an average return of 9 percent and a standard deviation of 6 percent over the sample he was shown. Which reading of the standard deviation is sound?

23.Keisha compares two funds measured against the same market index. Fund L has a beta of 0.6 and Fund H has a beta of 1.4. Which fund has more systematic risk?

24.Leo's account holds only three stocks, all of them factories in the same town. A local plant closing would hit all three. Which risk is still large?

25.Mina is told that the market index used in her plan has a beta of 1 against itself. What does that beta mean?

26.Noah's two funds earned the same average return. Fund A has a standard deviation of 4 percent and Fund B has a standard deviation of 18 percent. Which comparison is right?

27.Olga replaces a single biotech stock with many stocks from different industries. Which effect is the one that diversification is meant to produce?

28.Pablo's pension report lists a fund return of 9 percent, a cash rate of 1 percent, and a standard deviation of 8 percent. What Sharpe ratio belongs on that report?

29.Quilla's fund returned 7 percent. The benchmark named in her report returned 5 percent. What does a positive alpha of 2 percentage points mean here?

30.At Rafael's review, the fund page shows an 11 percent return, a 3 percent cash rate, and a 16 percent standard deviation. What Sharpe ratio is on that page?

31.Sonia's fund returned 4 percent. The benchmark described in her policy returned 6 percent. Which description of alpha is correct?

32.Theo's fund has a Sharpe ratio of 0.4 and Uma's fund has a Sharpe ratio of 0.9. Both ratios use the same cash rate. Which reading is right?

33.Vera says her balanced fund 'only' made 6 percent. The cash rate that year was 2 percent and the standard deviation was 10 percent. What is the Sharpe ratio?

34.Will's equity fund returned 14 percent. The benchmark in his quarterly report returned 11 percent. What is the alpha against that benchmark?

35.Xena's fund returned 10 percent with a standard deviation of 5 percent. The cash rate in the same report is 2 percent. Which calculation is the Sharpe ratio?

36.Yuri's fund and the benchmark named in his statement both returned 8 percent over the same year. What is the alpha?

37.Ada's bond is priced at $1,020. Market yields rise, and the bond's coupon and maturity do not change. What happens to the price?

38.Boris owns a bond that pays an annual coupon of $40. The bond's current market price is $800. What is the current yield?

39.Cora's bond has a 3 percent coupon rate and trades at $940, below its $1,000 face value. Which yield comparison is right?

40.Dev's bond pays a $60 annual coupon and the market price is $1,200. Face value is $1,000. What is the current yield?

41.Eve holds a bond whose yield required by buyers rises from 4 percent to 5 percent. The coupon stays the same. Which price response follows?

42.Frank's municipal bond has a 6 percent coupon rate and a yield to maturity of 7 percent. Which price description fits?

43.Greta tells her book club that a bond priced at $1,000, paying a $50 coupon once a year, has a current yield of $50. What is the current yield as a percent of the price?

44.Hank's bond has an 8 percent coupon and trades at $1,080, above a $1,000 face value. Which statement is right?

45.Ida's bond pays a $70 annual coupon and is priced at $1,000. If the market yield rises and the coupon stays $70, what happens to the price, and what is the current yield before the move?

46.Jules follows a utility. The next dividend is expected to be $2, the required return is 10 percent, and dividends are expected to grow at 5 percent from then on. What is the one-stage value?

47.Kai values a grocery chain. The next dividend is $3, shareholders require 12 percent, and the dividend is expected to grow at 6 percent a year thereafter. What value does the one-stage model give?

48.Lila's analyst priced a water company near $11 by dividing the $1 next dividend by the 9 percent required return and skipping 4 percent growth. What one-stage price uses both rates?

49.Marco inherited railroad shares. The trustee's notes show a $4 next dividend, an 11 percent required return, and 3 percent growth. What one-stage value should the worksheet use?

50.Nina can buy a regional-bank share for $28. Her inputs for a one-stage check are a $1.50 next dividend, an 8 percent required return, and 3 percent growth. What value do those inputs give?

51.Oscar's intern valued a software firm at $100 by dividing the $5 next dividend by 5 percent growth. The required return is 15 percent. What is the one-stage value?

52.Pia is checking whether a pharmacy share looks expensive. The next dividend is $2.40, she requires 10 percent, and growth is 4 percent. What one-stage value should she compare with the market price?

53.Quincy's medical-device stock has a tight gap: holders require 12 percent and dividends grow at 8 percent. The next dividend is $6. What one-stage value does that gap produce?

54.Rosa uses a one-stage model for a food company. The next dividend stays $2 and the required return stays 10 percent, but expected growth rises from 2 percent to 4 percent. What happens to the value?

55.Seth's pension bond has a duration of 8. A surprise report pushes its yield up by 1 percentage point, a change of 0.01. About how much does the price change, in percent?

56.Tara bought a note with a duration of 5 the week before a rate cut. The yield falls by 0.50 percentage points, a change of −0.005. About how much does the price change, in percent?

57.Trent holds two bonds with the same coupon rate. Bond Short has duration 3 and Bond Long has duration 10. Yields rise by the same amount on both. Which price falls more?

58.Uri's bond ladder includes a corporate note with a duration of 4. After a ratings review its yield rises 0.25 percentage points, or 0.0025. What is the approximate percent price change?

59.Vivian holds a long municipal bond with a duration of 12. In a rally its yield falls by 1 percentage point, a change of −0.01. What is the approximate percent price change?

60.Wes owns Bond A with duration 2 and Bond B with duration 7. Yields on both fall by the same small amount. Which price rises more, approximately?

61.Xio's credit-union bond has a duration of 6. During one afternoon the yield moves from 4 percent to 4.5 percent, a rise of 0.005. What is the approximate percent price change?

62.Yara's insurer marks a bond with a duration of 10 to market. On a quiet day its yield rises 0.20 percentage points, or 0.002. What is the approximate percent price change?

63.Zed owns two bonds, and each has a duration of 9. The yield on each rises by 0.01. Which approximate result is right?

64.Aaron's target is 60 percent stocks and 40 percent bonds. After a stock rally the account is 72 percent stocks and 28 percent bonds. What does rebalancing to the target call for?

65.Bianca holds a stock fund and a bond fund whose returns have moved in opposite directions in most years, so the correlation is negative. What can that do for the combined account?

66.Carl's stated target is 50 percent in a stock fund and 50 percent in a bond fund. A review shows the account is already at that 50/50 mix. What does rebalancing to the target require today?

67.Dina owns two stock funds that rise and fall together almost in lockstep. Their correlation is near 1. Which point is right?

68.Eli's target is 70 percent stocks and 30 percent bonds. The account is $100,000, now split as $80,000 stocks and $20,000 bonds. What trade restores the target?

69.Faye is splitting a new $10,000 deposit. Her target is 40 percent stocks and 60 percent bonds, and the rest of the account is already on target. How should she split the deposit?

70.Gabe's target is 60 percent stocks. A market decline leaves stocks at 48 percent of the account. What does rebalancing to the stated target mean?

71.Hana adds a fund whose past returns have been nearly uncorrelated with the fund she already holds. The correlation is about zero. Which description is fair?

72.Ivan's target is 25 percent in a foreign stock fund and 75 percent in a domestic stock fund. The account is $40,000, now $4,000 foreign and $36,000 domestic. What trade hits the target?

73.Jade wants the return of a broad U.S. stock index and does not want bets on single stocks. Which approach matches that goal?

74.Ken pays a manager to hold a portfolio that differs from the stated benchmark in an effort to beat it. What style is that?

75.Lena invests $300 on the first trading day of three months. The prices are $10, then $6, then $15. The fund allows fractional shares. How many shares does she buy in all?

76.Miles puts $100 into the same fund twice. The first price is $20 and the second price is $10. How many shares does he buy in total?

77.Nell compares an index fund with an annual expense of 0.05 percent and an active fund with an annual expense of 0.90 percent, before any performance difference. Which cost comparison is right?

78.Omar invests $200 when the share price is $8, then another $200 when the price is $10. How many shares does he buy?

79.Petra's active fund matched the index return before fees and then charged a higher fee than the index fund she could have held. What is the likely result versus that index fund?

80.Quinn buys $50 of a fund that allows fractional shares at a price of $5, then $50 at $4, then $50 at $10. How many shares does she own from these three purchases?

81.Raul buys an index fund that tracks a stated investment-grade bond index. Which claim is fair?

82.Sara is in a 37 percent federal bracket and uses a taxable account. A municipal bond pays 3 percent interest that is exempt from federal income tax. A taxable bond pays 4 percent. Which federal after-tax comparison is right?

83.Tom's taxable account holds a fund that sells winners within a few months and realizes those gains. He is in a high ordinary-income bracket. What is the federal tax character of those realized gains?

84.Una is in a 32 percent federal bracket. A municipal bond in her taxable account yields 3.4 percent interest, exempt from federal income tax. What taxable yield matches it after that tax?

85.Vic is in a 35 percent federal bracket and uses a taxable account. A taxable bond yields 6 percent. A municipal bond yields 4 percent, exempt from federal income tax. Which leaves more after federal tax?

86.Willa can hold a high-turnover fund that realizes short-term gains or a low-turnover fund that rarely sells. Both would sit in a taxable account, and she is in a high bracket. Which tax point matters?

87.Ximena is in the 24 percent federal bracket. In her taxable account, municipal interest of $1,000 is exempt from federal income tax. How much of that $1,000 does she keep after federal income tax?

88.Yasmin realized a $2,000 gain after holding a stock for three months in a taxable account. Her ordinary rate is 37 percent, and her long-term capital-gain rate is 15 percent. How much federal tax applies to this short-term gain at the ordinary rate?

89.Zack's federal tax rate on ordinary interest is 20 percent. A municipal bond in his taxable account yields 2 percent, and that interest is exempt from the tax. What taxable yield matches it after tax?

90.Amy is in a high federal bracket and has both a taxable account and a traditional IRA. She wants municipal-bond interest to keep its federal exemption. Where does that exemption do that work?

91.Blake wants real-estate exposure he can buy and sell on an exchange on most market days. He does not want a property that may take months to sell. Which choice fits?

92.Cara owns a share of a private apartment building. The partnership allows redemptions only once a year and can delay payment even then. What is the liquidity limit?

93.Diego adds a commodity fund that holds futures on oil and industrial metals. He wants something that need not move like his stock and bond mix. Which description fits?

94.Eva compares a nontraded real-estate investment trust, which repurchases shares only quarterly and may suspend repurchases, with a stock index fund she can sell each market day. Which liquidity statement is right?

95.Finn can buy a commodity mutual fund that redeems daily, or a private oil-well stake he cannot sell without the sponsor's consent. Which pairing is right?

96.Gail's policy allows a small alternatives sleeve. She buys a listed real-estate investment trust fund. What job can that sleeve do?

97.Harvey commits $50,000 to a private real-estate fund. The documents lock the money for seven years and allow no early redemption. Which point must the plan respect?

98.Ines wants exposure to energy and crop futures, and she needs to redeem on any business day. Which vehicle matches both facts?

99.Jon owns a listed real-estate investment trust. The share price fell 15 percent in a month, and he sold on the exchange the next morning. What does that episode show?

100.Kara is writing an investment policy. She needs a retirement fund in 25 years and can tolerate a large interim drop. Which statement belongs in the policy?

101.Luis's mix is 50 percent in a broad U.S. stock index and 50 percent in a broad U.S. bond index. Which benchmark matches the mix?

102.Mia needs the money for a house down payment in two years, and she can bear only a small loss. Which policy statement fits?

103.Ned's policy says he can bear a 10 percent decline. The proposed mix has fallen about 35 percent in similar past markets. What is the mismatch?

104.Opal's account is 80 percent bonds and 20 percent stocks. Her report compares her with a 100 percent stock index. What is wrong with that benchmark?

105.Paul's draft policy says he will accept wide swings and that the horizon is 15 years, but it never says what the money is for. What is missing?

106.Ruth's policy goal is next year's college tuition. The horizon is one year, she can bear almost no loss, and the mix is a short-term Treasury fund. Which benchmark matches?

107.Silas writes that the goal is a cabin purchase in eight years, the horizon is eight years, and he can bear a moderate drop but not a 50 percent loss. What did he include?

108.Tina's policy mix is 40 percent stocks and 60 percent bonds, and the benchmark is that same 40/60 blend. After a rally the account is 55 percent stocks, and she rebalances to 40/60. What should the benchmark do?