21. Beth Bixby, FRM, oversees a mid -cap fund that is required to invest in a minimum of 40 and a maximum of 60 different issues. Bixby uses a quantitative approach to actively manage the assets. In promotional materials, she states that "through our complex quantitative approach, securities are selected that have similar exposures to a number of risk factors that are found in the S&P 500 Index. Thus, the fund is designed to track the performance of the S&P 500 Index but will receive a return premium of between 2% and 4% according to our model's risk-return measures." This statement is:

A. permissible since the assertion is supported by modern portfolio theory and estimates from the firms' model.

B. not permissible since Bixby is misrepresenting the services that she and/or her firm are capable of performing.c

C. not permissible since Bixby is misrepresenting the investment performance, she and/or her firm can reasonably expect to achieve.

D. permissible since the statement describes the basic characteristics of the fund's risk and return objectives.

22. Gail Stefano, FRM, an analyst for a U.S. brokerage firm that serves U.S. investors, researches public utilities in South American emerging markets. Stefano makes the following statement in a recent report: "Based on the fact that the South American utilities sector has seen rapid growth in new service orders, we expect that most companies in the sector will be able to convert the revenue increases into significant profits. We also believe the trend will continue for the next three to five years." The report goes on to describe the major risks of investing in this market, in particular the political and exchange rate instability associated with South American countries. Stefano's report:

A. has not violated the Code.

B. violated the Code by failing to properly distinguish factual information from opinions.

C. violated the Code by recommending an investment which would not be suitable for all of its clients.

D. violated the Code by failing to properly identify details related to the operations of South American utilities.

23. Beth Anderson, FRM, is a portfolio manager for several wealthy clients including Reuben Carlyle. Anderson manages Carlyle 's personal portfolio of stock and bond investments. Carlyle recently told Anderson that he is under investigation by the IRS for tax evasion related to his business, Carlyle Concrete (CC). After learning about the investigation, Anderson proceeds to inform a friend at a local investment bank so that they may withdraw their proposal to take CC public. Which of the following is most likely correct? Anderson:

A. violated the Code by failing to immediately terminate the client relationship with Carlyle.

B. violated the Code by failing to maintain the confidentiality of her client's information.

C. violated the Code by failing to detect and report the tax evasion to the proper authorities.

D. did not violate the Code since the information she conveyed pertained to illegal activities on the part of her client.

24. The minimum level of capital a bank needs to maintain, according to its own estimates,

models, and risk assessments, is best described as its

A. equity capital.

B. financial capital.

C. economic capital.

D. regulatory capital

25. Which of the following actions in the banking system is most likely intended to address the

problem of moral hazard?

A. Deposit insurers charge risk-based premiums.

B. Banks increase loans to higher-risk borrowers

C. Governments implement deposit insurance programs.

D. Banks increase the interest rates they offer to depositors.

26.An investment bank is most likely to earn a trading profit from buying and selling securities if it arranges

A. a Dutch auction.

B. a private placement.

C. a best efforts offering

D. a firm commitment offering

27. The purpose of a Chinese wall in banking is to

A. prevent a bank failure from endangering other banks.

B. prevent a banks departments from sharing information.

C. restrict companies from offering both banking and securities services.

D. restrict companies from engaging in both commercial and investment banking.

28. A drawback of the originate-to-distribute banking model is that it has led to

A. too little liquidity in certain sectors.

B. too much liquidity in certain sectors.

C. looser credit standards in certain sectors.

D. tighter credit standards in certain sectors.

29. The relevant interest rate for insurance contracts is 2% per annum (semiannual compounding

applies) and all premiums are paid annually at the beginning of the year. A $2,000,000 term

insurance contract is being proposed for a 40-year-old male in average health. Assume that payouts

occur halfway throughout the year. Using the mortality rates estimated by the U.S. Social Security

Administration (in Figure 26.2), which of the following amounts is closest to the insurance

companys breakeven premium for a two-year term?

A. $4,246

B. $4,287

C. $4,332

D. $8,482

30. The following information pertains to a property and casualty (P&C) insurance company:

Investment income 5%

Dividends 2%

Loss ratio 74%

Expense ratio 23%

Based on the information provided, what is this companys operating ratio?

A. 90%

B. 94%

C. 97%

D. 99%