FP513- MODULE 8 ACTUAL PRACTICE EXAM

FP513- MODULE 8 (ACTUAL / ) PRACTICE EXAM

QUESTIONS AND 100% VERIFIED CORRECT ANSWERS (LATEST

UPDATE

A call option with an exercise price of $105 is selling in the open market for $4.25 when the market price of the underlying stock is $102. What is the intrinsic value of this option?The answer is $0. This call option is out-of-the-money; thus, its intrinsic value is zero.

What is the formula for determining the real rate of return on T-bonds?{[1+nominal rate of return)/(1+inflation rate)]-1}x100

Assume the nominal return on 30-year U.S. T-bonds is 6.5%, and the inflation rate is 1.75%. Which of the following is the real rate of return on the T-bonds?The answer is 4.67%. The real rate of return is 4.67%,

calculated as follows: {[(1 + 0.065) ÷ (1 + 0.0175)] -1} × 100 =

0.0467, or 4.67%.

What is the formula for Jensen's Alpha? 1 / 2

return on the investment - [risk free return + (return on the market - risk free return)(beta)]

During the past year, the stock market had a return of 8%, while the risk-free rate of return was 3%. Fund B had a realized return of 12%, a standard deviation of 15, and a beta of

1.20. Jensen's alpha for the fund is what?

The answer is 3.00%. Alpha = 12% - [3% + (8% - 3%)1.20] = 12% -

9% = 3%

When an inverted yield curve exists, should one sell short term bonds and buy long term bonds OR sell long term bonds and buy short term bonds?The answer is sell short-term bonds and buy long-term bonds.When a yield curve is inverted, a financial planner should consider purchasing long-term securities to lock in rates for a long period of time—in anticipation of lower yields in the future. Such a move might also result in a capital gain on the investment as bond prices rise.

What is the formula for the constant growth dividend discount model?(current annual dividend x constant growth rate)/(required rate of return - constant growth rate)

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