Canadian securities exam -WME Course For Financial Planners (WME-FP) – Quiz-09

C is correct because strategic asset allocation involves setting a long-term asset mix that aligns with the client’s investment goals and risk tolerance, while tactical asset allocation involves making short-term adjustments to take advantage of market opportunities.A is incorrect because it reverses the definitions of strategic and tactical asset allocation.B is incorrect as it mischaracterizes both strategic and tactical asset allocation.D is incorrect because both strategies aim to balance risk and return but in different time frames and methods.Relevant regulation: CSA guidelines on portfolio management emphasize the importance of aligning asset allocation strategies with the client’s investment objectives and risk tolerance.

B is correct because the Gordon Growth Model (GGM) is calculated as:[ \text{Intrinsic Value} = \frac{D_1}{r – g} ]Where:( D_1 ) is the dividend next year ($3)( r ) is the required rate of return (10% or 0.10)( g ) is the growth rate (4% or 0.04)Plugging in the values:[ \text{Intrinsic Value} = \frac{3}{0.10 – 0.04} = \frac{3}{0.06} = 50 ]A, C, and D are incorrect due to incorrect application of the GGM formula.Relevant regulation: The GGM is a commonly used method in equity valuation, as per the standards set by the CFA Institute and CSA regulations.

B is correct because wrap products charge a wrap fee, which typically covers all costs associated with the management, trading, and administration of the portfolio.A is incorrect because wrap products often have higher fees than passively managed funds due to active management.C is incorrect because wrap products are not tax-exempt when held outside registered accounts; investors must report income and gains.D is incorrect because wrap products are designed to offer a high level of diversification, similar to mutual funds and ETFs.Relevant regulation: CSA guidelines require transparency in fee structures and tax implications for investment products, ensuring clients are fully informed about their investments.

A is correct because the yield to call (YTC) is calculated considering the call price, the current price, the coupon payments, and the time to the call date. The formula for YTC is complex and typically requires financial calculators or software. However, for the purposes of this problem, assume a financial calculator is used to find:[ \text{YTC} \approx 6.78% ]The detailed steps involve calculating the present value of coupon payments and the call price and then solving for the rate that equates this to the current bond price.B, C, and D are incorrect due to miscalculations or misunderstanding the YTC concept.Relevant regulation: The CSA mandates accurate calculation and disclosure of bond yields, including YTC, to investors.

A is correct because the P/E ratio is calculated as:[ \text{P/E ratio} = \frac{\text{Market Price per Share}}{\text{Earnings per Share}} = \frac{120}{6} = 20 ]Since the company’s P/E ratio (20) is higher than the industry average (18), it suggests that the stock may be overvalued compared to its peers.B, C, and D are incorrect due to incorrect calculations or interpretations of the P/E ratio.Relevant regulation: Proper equity valuation techniques, including P/E ratio analysis, are essential for compliance with CSA regulations and standards set by the CFA Institute.

A is correct because long/short equity strategies involve identifying securities that are expected to outperform (long positions) and those that are expected to underperform (short positions). This approach aims to reduce overall market exposure while generating alpha through stock selection.B is incorrect because long/short equity strategies can be effective in both bull and bear markets, depending on the skill of the manager in selecting the right securities.C is incorrect because while hedging can reduce some risks, it does not eliminate all risks associated with equity investing.D is incorrect because long/short equity strategies can be more volatile than market-neutral strategies, as they do not fully neutralize market exposure.Relevant regulation: CSA guidelines require that investors are informed about the risks and strategies of hedge funds to make well-informed investment decisions.

A is correct because Mr. Carter needs to sell enough equities to bring the portfolio back to the 60% equities and 40% bonds allocation. Currently:[ \text{Equities value} = 70% \times 1,000,000 = 700,000 ] [ \text{Bonds value} = 30% \times 1,000,000 = 300,000 ]The target value for equities should be:[ 60% \times 1,000,000 = 600,000 ]The target value for bonds should be:[ 40% \times 1,000,000 = 400,000 ]Therefore, Mr. Carter should sell:[ 700,000 – 600,000 = 100,000 \text{ in equities} ]And buy:[ 400,000 – 300,000 = 100,000 \text{ in bonds} ]B, C, and D are incorrect due to incorrect calculations or misunderstanding the rebalancing process.Relevant regulation: Maintaining appropriate asset allocation is crucial under CSA guidelines for proper portfolio management and risk control.

A is correct because the intrinsic value using the DDM is calculated as:[ \text{Intrinsic Value} = \frac{D_1}{r – g} ]Where:( D_1 ) is the dividend next year ($4)( r ) is the required rate of return (9% or 0.09)( g ) is the growth rate (3% or 0.03)Plugging in the values:[ \text{Intrinsic Value} = \frac{4}{0.09 – 0.03} = \frac{4}{0.06} = 66.67 ]B, C, and D are incorrect due to incorrect calculations or misinterpretation of the DDM formula.Relevant regulation: The DDM is an important method in equity valuation, as per standards set by the CFA Institute and CSA regulations.

D is correct because bond price sensitivity to interest rate changes is measured by duration. Longer maturity bonds typically have higher durations, making them more sensitive to interest rate changes. Since Bond B has a longer maturity (10 years) compared to Bond A (5 years), Bond B will experience a greater price decline when interest rates rise.A and C are incorrect because shorter maturity bonds with lower durations are less sensitive to interest rate changes.**B is partially correct regarding maturity but incorrect regarding the coupon rate, as the duration effect of longer maturity outweighs the coupon rate effect.Relevant regulation: Understanding bond price sensitivity to interest rate changes is essential for compliance with CSA guidelines on fixed income securities.

C is correct because we first calculate the new values for each asset class:Equities:
[
50% \times 1,000,000 = 500,000 \rightarrow 500,000 \times 0.80 = 400,000 ]Bonds:
[
30% \times 1,000,000 = 300,000 \rightarrow 300,000 \times 1.05 = 315,000 ]Alternatives:
[
20% \times 1,000,000 = 200,000 ]Total new value:
[
400,000 + 315,000 + 200,000 = 915,000 ]New allocation percentages:
Equities:
[
\frac{400,000}{915,000} \approx 43.7%
]Bonds:
[
\frac{315,000}{915,000} \approx 34.4%
]Alternatives:
[
\frac{200,000}{915,000} \approx 21.9%
]A, B, and D are incorrect due to incorrect calculations or misinterpretations of the market impact on the portfolio.Relevant regulation: The CSA requires accurate portfolio rebalancing to maintain adherence to the client’s risk tolerance and investment goals.

B is correct because the PEG ratio is calculated as:[ \text{PEG ratio} = \frac{\text{P/E ratio}}{\text{Earnings Growth Rate}} = \frac{18}{6} = 3 ]Since the company’s PEG ratio (3) is higher than the industry average (1.2), it suggests that the stock is overvalued compared to its peers.A, C, and D are incorrect due to incorrect calculations or misinterpretation of the PEG ratio.Relevant regulation: Proper equity valuation techniques, including PEG ratio analysis, are essential for compliance with CSA regulations and standards set by the CFA Institute.

A is correct because zero-coupon bonds do not make periodic interest payments, resulting in all interest being realized at maturity. This makes their duration equal to their maturity, which is higher than that of coupon bonds. Higher duration means greater sensitivity to interest rate changes, leading to a larger price decline if interest rates rise.B is incorrect because Bond X has higher, not lower, duration.C is incorrect because Bond Y’s periodic coupon payments reduce its duration, making it less sensitive to interest rate changes.D is incorrect because Bond X, not Bond Y, has higher duration.Relevant regulation: Understanding bond price volatility and interest rate sensitivity is crucial under CSA guidelines for proper fixed income securities management.

C is correct because Mr. Taylor needs to rebalance his portfolio to maintain a 60% equities and 40% bonds allocation. Currently:Equities:
[
\frac{750,000}{1,200,000} = 62.5%
]Bonds:
[
\frac{450,000}{1,200,000} = 37.5%
]To rebalance to 60% equities and 40% bonds:Target equities value:
[
60% \times 1,200,000 = 720,000 ]Target bonds value:
[
40% \times 1,200,000 = 480,000 ]Therefore, Mr. Taylor should sell: [ 750,000 – 720,000 = 30,000 ]And buy: [ 480,000 – 450,000 = 30,000 ]A, B, and D are incorrect due to incorrect calculations or misunderstanding the rebalancing process.Relevant regulation: The CSA requires accurate portfolio rebalancing to maintain adherence to the client’s risk tolerance and investment goals.

B is correct because the company’s P/E ratio (25) is higher than the industry average (20), suggesting that the stock may be overvalued compared to its peers. This indicates that investors are willing to pay more for each dollar of earnings, which could be due to high growth expectations or market overexuberance.A and D are incorrect because a higher P/E ratio compared to the industry average generally indicates overvaluation, not undervaluation.C is incorrect because the stock is not priced in line with the industry average, indicating a deviation from fair value.Relevant regulation: Proper equity valuation techniques, including the use of P/E ratios, are essential for compliance with CSA regulations and standards set by the CFA Institute.

C is correct because duration is a measure of a bond’s sensitivity to interest rate changes. Longer duration bonds are more sensitive to interest rate changes, meaning Bond B (10-year) will experience a greater percentage price decline compared to Bond A (5-year) when interest rates rise.A is incorrect because shorter duration bonds are less sensitive to interest rate changes.**B is partially correct regarding duration but incorrect about the coupon rate’s impact.D is incorrect because the duration of the bonds affects their price sensitivity differently.Relevant regulation: Understanding bond price volatility and interest rate sensitivity is crucial under CSA guidelines for proper fixed income securities management.

D is correct because duration is a measure of a bond’s sensitivity to interest rate changes. Bonds with longer maturities generally have higher durations, making them more sensitive to interest rate fluctuations. Thus, Bond D, with a 10-year maturity, will experience a greater percentage price decline compared to Bond C, with a 7-year maturity, when interest rates rise.A, B, and C are incorrect because they misinterpret the relationship between bond maturity, coupon rates, and interest rate sensitivity. A bond with a longer duration (Bond D) is more affected by interest rate changes than one with a shorter duration (Bond C).Relevant regulation: Understanding bond price volatility and interest rate sensitivity is crucial under CSA guidelines for proper fixed income securities management.

C is correct because the portfolio return can be calculated using the weighted average return of each asset class:[ \text{Portfolio Return} = (0.60 \times 8%) + (0.40 \times 3%) = 4.8% + 1.2% = 6.0% ]The return attributable to the asset allocation strategy matches the overall portfolio return, confirming the portfolio’s performance aligns with the strategic asset allocation.A, B, and D are incorrect because they do not correctly calculate the weighted average return of the portfolio.Relevant regulation: Accurate portfolio performance evaluation is essential under CSA guidelines to ensure that investment strategies meet the client’s goals and risk tolerance.

B is correct because global macro strategies involve taking positions based on macroeconomic and political views on entire economies. These strategies often use significant leverage to amplify returns, which can lead to high volatility.A is incorrect because global macro strategies use both technical analysis and fundamental economic data.C is incorrect because these strategies are not confined to specific regions; they can invest globally based on the manager’s outlook.D is incorrect because global macro strategies can invest in a wide range of asset classes, including equities, bonds, currencies, and commodities.Relevant regulation: Hedge fund strategies, including global macro, must be fully disclosed to investors as required by CSA guidelines, ensuring investors understand the associated risks.

B is correct because bond price sensitivity to interest rate changes is measured by duration. Longer duration bonds are more sensitive to interest rate changes, leading to a greater price increase when interest rates drop. Bond Y, with a 10-year maturity, has a longer duration compared to Bond X, which has a 5-year maturity, and will therefore experience a greater price increase.A, C, and D are incorrect because they misinterpret the impact of coupon rates and durations on bond price sensitivity to interest rate changes. The longer duration of Bond Y makes it more sensitive to changes in interest rates.Relevant regulation: Understanding bond price volatility and interest rate sensitivity is crucial under CSA guidelines for proper fixed income securities management.

A is correct because the PEG ratio is calculated as:[ \text{PEG ratio} = \frac{\text{P/E ratio}}{\text{Earnings Growth Rate}} = \frac{15}{5} = 3 ]Since the company’s PEG ratio (3) is higher than the industry average (1.5), it suggests that the stock is overvalued compared to its peers.B and C are incorrect because a higher PEG ratio compared to the industry average generally indicates overvaluation, not undervaluation.D is incorrect because the stock is not priced in line with the industry average, indicating a deviation from fair value.Relevant regulation: Proper equity valuation techniques, including the use of PEG ratios, are essential for compliance with CSA regulations and standards set by the CFA Institute.

B is correct because tracking error quantifies the deviation between the performance of the ETF and its benchmark index. A lower tracking error indicates that the ETF more closely follows the performance of the index it aims to replicate.A is incorrect because tracking error specifically measures the performance difference relative to the benchmark, not overall market volatility.C is incorrect because a higher tracking error usually indicates worse performance in terms of replicating the index.D is incorrect because tracking error is relevant for both actively managed and passively managed funds, especially ETFs that aim to track specific indices.Relevant regulation: Understanding tracking error is essential under CSA guidelines for evaluating the performance of managed products and ensuring they meet investment objectives.

B is correct because we first calculate the target values for each asset class based on the total portfolio value of $800,000:Equities:
[
30% \times 800,000 = 240,000 ]Bonds:
[
50% \times 800,000 = 400,000 ]Cash:
[
20% \times 800,000 = 160,000 ]Currently, Mr. Lee has $250,000 in equities, $400,000 in bonds, and $150,000 in cash. To achieve the target allocation:Sell $10,000 in equities:
[
250,000 – 240,000 = 10,000 ]Buy $10,000 in cash:
[
160,000 – 150,000 = 10,000 ]A, C, and D are incorrect due to incorrect calculations or misunderstanding of the target allocation process.Relevant regulation: The CSA requires accurate portfolio rebalancing to maintain adherence to the client’s risk tolerance and investment goals.

A is correct because corporate bonds typically have higher interest rate sensitivity compared to government bonds, primarily due to differences in liquidity, credit risk, and yield spreads. While both bonds have the same maturity, the higher sensitivity of corporate bonds to interest rate changes means Bond A will likely experience a greater percentage price decline compared to Bond B.B is incorrect because government bonds generally have lower sensitivity to interest rate changes compared to corporate bonds.C is incorrect because the coupon rate itself does not determine the interest rate sensitivity in this context.D is incorrect because the type of bond (corporate vs. government) affects interest rate sensitivity.Relevant regulation: Understanding bond price volatility and interest rate sensitivity is crucial under CSA guidelines for proper fixed income securities management.

A is correct because the expected portfolio return based on its strategic asset allocation can be calculated as follows:[ \text{Expected Portfolio Return} = (0.70 \times 10%) + (0.30 \times 2%) = 7% + 0.6% = 7.6% ]Since the portfolio returned 8.4%, it performed better than the expected 7.6%, indicating that the actual performance exceeded the anticipated return based on the strategic asset allocation.B, C, and D are incorrect because they misinterpret the portfolio’s actual return relative to the expected return based on the asset allocation.Relevant regulation: Accurate portfolio performance evaluation is essential under CSA guidelines to ensure that investment strategies meet the client’s goals and risk tolerance.

A is correct because according to CAPM, the expected return of a stock is calculated as follows:[ \text{Expected return} = \text{Risk-free rate} + (\text{Beta} \times (\text{Market return} – \text{Risk-free rate})) ]Using the given values:For Stock X:
[
\text{Expected return} = 3% + (1.5 \times (10% – 3%)) = 12%
]For Stock Y:
[
\text{Expected return} = 3% + (0.8 \times (10% – 3%)) = 8.4%B, C, and D are incorrect because they incorrectly interpret the relationship between beta and expected return according to CAPM. Stock X’s higher beta implies higher systematic risk, leading to a higher expected return.Relevant regulation: Understanding the CAPM model is crucial for equity valuation and risk assessment, aligning with CSA guidelines and industry best practices.

A is correct because a long-short equity strategy involves taking both long positions (buying securities) and short positions (borrowing securities to sell), allowing the fund to profit from both increasing and decreasing stock prices. This characteristic distinguishes it from traditional long-only equity strategies, which only involve buying securities.B, C, and D are incorrect because they describe aspects that may apply to various investment strategies but do not specifically differentiate a long-short equity strategy.Relevant regulation: Understanding the characteristics of different investment strategies, including long-short equity, is essential for compliance with CSA regulations and ensuring investors are informed about the risks and objectives of managed products.

B is correct because the Sharpe ratio measures the risk-adjusted return of an investment or portfolio relative to a risk-free asset or benchmark. A higher Sharpe ratio indicates better risk-adjusted performance. Since Mr. Nguyen’s portfolio has a lower Sharpe ratio than the market, it indicates that his portfolio has underperformed the market on a risk-adjusted basis.A, C, and D are incorrect because they misinterpret the relationship between the Sharpe ratio and portfolio performance relative to the market.Relevant regulation: Sharpe ratio analysis is a common tool used in portfolio monitoring and performance evaluation, aligning with CSA guidelines for assessing investment performance.

B is correct because ETFs, being traded on exchanges like stocks, allow investors to buy and sell shares throughout the trading day at market prices. In contrast, mutual funds are priced once a day after the market closes, and investors buy or redeem shares at the net asset value (NAV) calculated at that time.A, C, and D are incorrect because they do not accurately describe the key difference between ETFs and mutual funds. Liquidity, expense ratios, and diversification can vary for both ETFs and mutual funds depending on their underlying assets and structure.Relevant regulation: Understanding the differences between ETFs and mutual funds is crucial for compliance with CSA regulations and making informed investment decisions.

C is correct because alternative investments, such as private equity, hedge funds, and real estate, often have low correlation with traditional asset classes like stocks and bonds. By adding alternative investments to a portfolio, investors can achieve greater diversification, potentially reducing overall portfolio risk.A, B, and D are incorrect because they either misrepresent the characteristics of alternative investments or suggest benefits that are not commonly associated with them.Relevant regulation: Understanding the role of alternative investments in asset allocation is essential for compliance with CSA regulations and ensuring portfolios are appropriately diversified.

D is correct because the difference between the geometric mean return (which accounts for compounding) and the arithmetic mean return (which does not) indicates the presence of skewness in the portfolio’s return distribution. A higher geometric mean suggests that the portfolio’s returns were weighted more heavily towards higher-performing periods, indicating negative skewness.A, B, and C are incorrect because they do not accurately interpret the difference between the geometric and arithmetic means in the context of the portfolio’s performance.Relevant regulation: Understanding the different measures of portfolio performance is crucial for compliance with CSA regulations and ensuring accurate reporting to investors.