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AAMS EXAM QUESTIONS AND ANSWERS
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AAMS EXAM QUESTIONS AND ANSWERS
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AAMS EXAM QUESTIONS AND ANSWERSstandard deviation - Answers -Variability around the mean; a measure of total risk;
absolute.
Beta - Answers -Volatility relative to a benchmark; a measure of relative risk; not static
What did the Brinson study evaluate? - Answers -Security selection, market timing, and
asset allocation policy.
What conclusion did the Brinson study reach? - Answers -More attention should be
given to the asset allocation process and less given to securities selection and market
timing.
What's the importance of asset allocation in a clients investment strategy? - Answers -
Clients must be active in determining their asset allocation and explicit about objectives,
risk, and liquidity over the long term.
T-Bills average (geometric) rate of returns, as well as inflation, since 1926 - Answers -
3.3%
Long-term U.S. government bonds average (geometric) rate of returns, as well as
inflation, since 1926 - Answers -5.5%
Long-term corporate bonds average (geometric) rate of returns, as well as inflation,
since 1926 - Answers -5.9%
Intermediate-term U.S. government bonds average (geometric) rate of returns, as well
as inflation, since 1926 - Answers -5.1%
Large-company stocks average (geometric) rate of returns, as well as inflation, since
1926 - Answers -10%
Small-company stocks average (geometric) rate of returns, as well as inflation, since
1926 - Answers -11.8%
Inflation average (geometric) rate of returns, as well as inflation, since 1926 - Answers -
2.9%
Define strategic asset allocation - Answers -The identification of the asset mix that will
provide the optimal balance between expected risk and return for a long-term
investment horizon.
How is strategic asset allocation maintained? - Answers -With periodic rebalancing by
repositioning higher performing assets into lower performing assets.
, Define tactical asset allocation - Answers -This is the use of securities selection, sector
rotation, and market timing to periodically revise the asset mix of a portfolio.
Define core/satellite asset allocation - Answers -This approach involves a combination
of strategic and tactical asset allocation enabled by dividing a portfolio into a core
holding of stocks and bonds, often broad based, low cost index mutual funds or etfs,
and a satellite portion.
What are the characteristics of common stock? - Answers -Shareholders receive
dividends on a pro rata basis, vote on the election of corporate board members, are
residual owners of the firm (meaning their interests are subordinate to creditors and
bond holders), and the shares have no maturity
What are the sources of risk for common stock? - Answers -A downturn in economic
growth, high interest rates, loss of product or service competitiveness, failures of
management, and government action
What are the characteristics of preferred stock? - Answers -Dividends are usually fixed,
qualified and not tax-deductible to the paying corporation, they're paid ahead of
common shares, limited voting rights, and are generally 70% tax free to owning
corporations and can have participating, cumulative, callable, and convertible features
What are the characteristics of a treasury bill? - Answers -These have US government
obligations and are issued at a discount to face value. The minimum denomination is
$100 and they are sold in multiples of $100. Interest on Treasury bills is free from state
income taxation but taxable at the federal level.
What are the characteristics of negotiable certificates of deposit? - Answers -CDs of
$100k or more, pay a fixed rate of interest taxes at both the federal and state levels,
quality depends on the issuing bank
What are the characteristics of a Eurodollar certificate of deposit? - Answers -US dollar
denominated CDs issued by foreign branches of major US and foreign banks, not FDIC
insured, no reserve requirements on these CDs, no maximum maturity but usually are
three to six months
What are the characteristics of a Yankee certificate of deposit? - Answers -US dollar
denominated CDs issued by foreign banks from their US branches, maturities of one
year or less pay interest at maturity, maturities longer than one year pay interest
semiannually or annually
What are the characteristics of commercial paper? - Answers -Unsecured IOUs of
corporations, usually sold at a discount with maturities up to 270 days
What are the characteristics of banker's acceptances? - Answers -Discounted time
drafts used mainly in financing international trade, the bank stamping "accepted"
promises to pay the draft at maturity, and maturities are generally 30 to 180 days
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