PFS Investment Planning 2

Question 1

A client holds a portfolio with a beta of 1.4 and the market returns 8% while the risk-free rate is 2%. What is the expected return according to CAPM?

Accepted Answer

10.4%

Answer

CAPM: Expected return = Rf + β(Rm - Rf) = 2% + 1.4(8% - 2%) = 2% + 8.4% = 10.4%.

Question 2

Which bond characteristic causes its price to be more sensitive to interest rate changes?

Accepted Answer

Lower coupon rate

Answer

Lower coupon bonds have higher duration, meaning their prices are more sensitive to interest rate movements.

Question 3

A client wants inflation protection with liquidity. Which investment is MOST appropriate?

Accepted Answer

Treasury Bills

Answer

Treasury Bills provide liquidity and implicitly track short-term rates that often adjust with inflation, though TIPS are superior for direct inflation protection; among these options T-Bills best combine both needs.

Question 4

What does the Sharpe ratio measure?

Accepted Answer

Excess return per unit of total risk

Answer

The Sharpe ratio equals (portfolio return - risk-free rate) divided by the portfolio's standard deviation, measuring reward per unit of total risk.

Question 5

An investor in the 37% federal tax bracket compares a 4.5% municipal bond to a taxable bond. What taxable equivalent yield makes them equal?

Accepted Answer

7.14%

Answer

Taxable equivalent yield = 4.5% / (1 - 0.37) = 4.5% / 0.63 ≈ 7.14%.

(PFS) Personal Financial Specialist Practice Test

(PFS) Personal Financial Specialist Practice Test

PFS Investment Planning 2