CSLB General Building (B) — All Questions

During the contraction phase of the business cycle, which of the following typically occurs?

• a.Gross domestic product rises for at least two consecutive quarters
• b.Unemployment rises while business inventories tend to increase✓
• c.Consumer spending accelerates and corporate profits expand
• d.The central bank aggressively raises short-term interest rates

A contraction is marked by falling output, rising unemployment, and weakening demand, which often leaves unsold goods and swelling inventories. Two consecutive quarters of rising GDP describe an expansion, not a contraction. Central banks generally cut rates during downturns to stimulate activity.

An economist states that the money supply and general price level tend to move together over time. This view is most closely associated with which school of thought?

• a.Keynesian economics
• b.Supply-side economics
• c.Monetarist economics✓
• d.Behavioral economics

Monetarists, led by Milton Friedman, argue that changes in the money supply are the primary driver of inflation and nominal output. Keynesians emphasize aggregate demand and fiscal policy. Supply-siders focus on tax and regulatory incentives to production.

Which government body sets U.S. monetary policy by adjusting the federal funds target and open market operations?

• a.The Federal Open Market Committee of the Federal Reserve✓
• b.The U.S. Treasury Department
• c.Congress through the annual budget process
• d.The Securities and Exchange Commission

Monetary policy is conducted by the Federal Reserve, and specifically the Federal Open Market Committee (FOMC), through open market operations and interest rate targets. Congress and the Treasury handle fiscal policy such as taxing and spending. The SEC regulates securities markets, not monetary policy.

An investor expects $10,000 in 5 years and wants its present value at a 6% annual discount rate. Which statement is correct?

• a.The present value equals $10,000 multiplied by 1.06 raised to the fifth power
• b.The present value is greater than $10,000
• c.A higher discount rate would raise the present value
• d.The present value equals $10,000 divided by 1.06 raised to the fifth power✓

Present value discounts a future amount back to today by dividing by (1 + rate) raised to the number of periods. Because money has time value, the present value is less than the future $10,000. A higher discount rate lowers, not raises, present value.

A portfolio has an expected return of 9% and a standard deviation of 12%. What does the standard deviation measure?

• a.The portfolio's sensitivity to overall market movements
• b.The dispersion or variability of the portfolio's returns around its mean✓
• c.The portfolio's return in excess of a risk-free asset
• d.The correlation between the portfolio and a benchmark index

Standard deviation is a statistical measure of total volatility, showing how widely returns are dispersed around their average. Sensitivity to the market is measured by beta, and excess return over the risk-free rate relates to alpha or the risk premium. Correlation is a separate measure of co-movement between two series.

Two assets have a correlation coefficient of -1.0. What is the diversification implication?

• a.The assets move perfectly together, offering no diversification benefit
• b.The assets are unrelated and provide moderate diversification
• c.The assets move exactly opposite, offering maximum diversification benefit✓
• d.Correlation cannot fall below zero for real assets

A correlation of -1.0 means two assets move in exactly opposite directions, which allows losses in one to be offset by gains in the other and provides the greatest diversification benefit. A correlation of +1.0 offers no diversification. Correlation ranges from -1.0 to +1.0, so negative values are possible.

A stock's beta is 1.5. If the market rises 10%, what does beta suggest about the stock's expected move?

• a.The stock would be expected to rise about 15%✓
• b.The stock would be expected to rise about 6.7%
• c.The stock is uncorrelated with the market
• d.The stock would be expected to fall about 15%

Beta measures systematic risk relative to the market; a beta of 1.5 means the stock is expected to move 1.5 times as much as the market. A 10% market gain implies an expected 15% gain. Beta above 1.0 indicates greater volatility than the market.

Which of the following is a leading economic indicator?

• a.The unemployment rate
• b.Corporate profits reported for the prior quarter
• c.The average duration of unemployment
• d.New building permits issued for housing✓

Leading indicators, such as new building permits and stock prices, tend to change before the broader economy does. The unemployment rate and average duration of unemployment are lagging indicators. Prior-quarter corporate profits reflect activity that has already occurred.

A company's current ratio is calculated as which of the following?

• a.Net income divided by total shareholders' equity
• b.Current assets divided by current liabilities✓
• c.Total liabilities divided by total assets
• d.Earnings before interest and taxes divided by interest expense

The current ratio measures short-term liquidity by dividing current assets by current liabilities. Net income over equity is return on equity, and total liabilities over assets is a leverage ratio. EBIT over interest expense is the interest coverage ratio.

An investor earns a 12% nominal return in a year when inflation is 4%. Using the approximate method, the real return is closest to which of the following?

• a.16%
• b.3%
• c.8%✓
• d.48%

The approximate real return is the nominal return minus the inflation rate, or 12% minus 4%, which equals about 8%. Real return adjusts nominal gains for the loss of purchasing power. This distinction matters when evaluating whether an investment truly grows wealth.

Which measure best captures the total percentage gain from an investment, including both price change and reinvested income?

• a.Total return✓
• b.Current yield
• c.Coupon rate
• d.Nominal yield

Total return combines price appreciation and income (such as dividends or interest), giving the complete measure of performance. Current yield reflects only annual income relative to price. Coupon rate and nominal yield reflect only a bond's stated interest, not price changes.

The Consumer Price Index (CPI) is primarily used to measure which of the following?

• a.The total output of the economy
• b.The unemployment level
• c.Corporate earnings growth
• d.Changes in the price level of a basket of consumer goods and services✓

The CPI tracks the average change over time in prices paid by consumers for a representative basket of goods and services, serving as a common inflation gauge. Total output is measured by GDP. Unemployment and corporate earnings are separate economic statistics.

Under the time value of money, which factor increases the future value of a single deposit?

• a.A shorter investment horizon
• b.A higher interest rate compounded over more periods✓
• c.A lower rate of compounding
• d.More frequent withdrawals

Future value grows with higher interest rates and more compounding periods, because each period's interest earns further interest. Shorter horizons and lower rates reduce future value. Withdrawals reduce the balance that can compound.

A yield curve that slopes downward, with short-term rates higher than long-term rates, is described as which of the following?

• a.A normal yield curve
• b.A flat yield curve
• c.An inverted yield curve✓
• d.A humped yield curve

An inverted yield curve occurs when short-term interest rates exceed long-term rates and is often watched as a potential recession signal. A normal curve slopes upward. A flat curve shows little difference between short and long maturities.

Which statement about the Sharpe ratio is correct?

• a.It measures return earned per unit of total risk, using standard deviation✓
• b.It measures return earned per unit of systematic risk, using beta
• c.A lower Sharpe ratio indicates better risk-adjusted performance
• d.It ignores the risk-free rate entirely

The Sharpe ratio divides a portfolio's excess return over the risk-free rate by its standard deviation, measuring reward per unit of total risk. A higher ratio indicates better risk-adjusted performance. The Treynor ratio, by contrast, uses beta as the risk measure.

An analyst using fundamental analysis of a common stock would most likely focus on which of the following?

• a.Chart patterns and trading volume trends
• b.The stock's 200-day moving average
• c.Support and resistance price levels
• d.The company's earnings, revenues, and competitive position✓

Fundamental analysis evaluates a company's financial statements, earnings, revenues, management, and industry position to estimate intrinsic value. Chart patterns, moving averages, and support and resistance levels are tools of technical analysis, which studies price and volume history instead.