Reference no: EM134421

Question 1.

In an investment policy statement the objectives of an investor are expressed in terms of

a.  risk and return
b.  risk
c.  return
d.  time horizon
e.  liquidity needs
 
Question 2.

Which of the following is not a step in the portfolio management process?

a.  Develop a policy statement.
b.  Study current financial and economic conditions.
c.  Construct the portfolio.
d.  Monitor investor's needs and market conditions.
e.  Sell all assets and reinvestment proceeds at least once a year.
 
Question 3.

The first step in the investment process is the development of a(n)

a.  Objective statement.
b.  Policy statement.
c.  Financial statement.
d.  Statement of cash needs.
e.  Statement of cash flows.
 
Question 4.

Which of the following is not considered to be an investment objective?

a.  Capital preservation
b.  Capital appreciation
c.  Current income
d.  Total return
e.  None of the above (that is, all are considered investment objectives) 
 
Question 5.

____ refer(s) to the ability to convert assets to cash quickly and at a fair market price and often increase(s) as one approaches the later stages of the investment life cycle.

a.  Liquidity needs
b.  Time horizons
c.  Liquidation values
d.  Liquidation essentials
e.  Capital liquidations
 
Question 6.

The policy statement may include a ____ against which a portfolio's or portfolio manager's performance can be measured.

a.  Milestone
b.  Benchmark
c.  Landmark
d.  Reference point
e.  Market pair

Question 7.

Asset allocation is

a.  The process of dividing funds into asset classes.
b.  Concerned with returns variability.
c.  Concerned with the risk associated with different assets.
d.  Concerned with the relationship among investments' returns.
e.  All of the above.

Question 8.

Research has shown that the asset allocation decision explains ____% of the variation in fund returns across all funds, and ____% of the variation in returns for a particular fund over time.

a.  90 and 100.
b.  100 and 40.
c.  90 and 40.
d.  40 and 100.
e.  40 and 90.
 
Question 9.

Once the portfolio is constructed, it must be continuously

a.  Rebalanced.
b.  Recycled
c.  Reinvested
d.  Monitored.
e.  Manipulated.
 
Question 10.

Which of the following statements is false?

a.  Unrealized capital gains are taxable.
b.  Realized capital gains are taxable.
c.  Tax-exempt investments are attractive to individuals with high tax liabilities.
d.  Returns comparisons should be made on an equivalent tax basis.
e.  Tax exempt investors prefer tax exempt investments.
 
Question 11.

For an investor with a time horizon of 6 to 10 years and lower risk tolerance, an appropriate asset allocation strategy would be
a.  100% stocks
b.  100% cash
c.  30% cash, 50% bonds, and 20% stocks
d.  10% cash, 30% bonds, and 60% stocks
e.  100% bonds
 
Question 12.

For an investor with a time horizon of 6 to 10 years and higher risk tolerance, an appropriate asset allocation strategy would be

a.  100% stocks
b.  100% cash
c.  30% cash, 50% bonds, and 20% stocks
d.  10% cash, 30% bonds, and 60% stocks
e.  100% bonds
 
Question 13.

If you are considering investing in German stocks as a means to reduce the risk of your portfolio, the initial factor that you should examine is:

a.  The average rate of return of the portfolio when you combine U.S. and German stocks.
b.  The standard deviation of the German stocks.
c.  The standard deviation of the German stocks compared to the standard deviation of U.S. stocks.
d.  The correlation between the rates of return for German stocks and U.S. stocks.
e.  The coefficient of variation (CV) of rates of return for German stocks versus the CV of rates of return for U.S. stocks.

Question 14.

The correlation between U.S. equities and U.S. government bonds is

a.  Strongly positive.
b.  Weakly Positive.
c.  Strongly Negative.
d.  Weakly Negative.
e.  Indeterminate.
 
Question 15.

In order to diversify risk an investor must have investments that have correlations with other investments in the portfolio that are

a.  low positive
b.  zero
c.  negative
d.  any of the above
e.  none of the above
 
 
Question 16. If the real return for corporate bonds was 4% and the inflation rate was 2%, what is the nominal return for corporate bonds?

a.  1.96%
b.  2.00%
c.  4.00%
d.  6.08%
e.  6.42%
 
Question 17.

The purpose of calculating the covariance between two stocks is to provide a(n) ____ measure of their movement together.

a.  Absolute
b.  Relative
c.  Indexed
d.  Loglinear
e.  Squared
 
Question 18.

In a two-stock portfolio, if the correlation coefficient between two stocks were to decrease over time every thing else remaining constant the portfolio's risk would

a.  Decrease.
b.  Remain constant.
c.  Increase.
d.  Fluctuate positively and negatively.
e.  Be a negative value.
 
Question 19.

A portfolio is considered to be efficient if:

a.  No other portfolio offers higher expected returns with the same risk.
b.  No other portfolio offers lower risk with the same expected return.
c.  There is no portfolio with a higher return.
d.  Choices a and b
e.  All of the above
 
Question 20.

The optimal portfolio is identified at the point of tangency between the efficient frontier and the

a.  highest possible utility curve.
b.  lowest possible utility curve.
c.  middle range utility curve.
d.  steepest utility curve.
e.  flattest utility curve.
 
Question 21.

Between 1990 and 2000, the standard deviation of the returns for the NIKKEI and the DJIA indexes were 0.18 and 0.16, respectively, and the covariance of these index returns was 0.003. What was the correlation coefficient between the two market indicators?

a.  9.6
b.  0.0187
c.  0.1042
d.  0.0166
e.  0.343 

Question 22.

What is the expected return of the three-stock portfolio described below?
 
Common Stock  Market Value  Expected Return
Lupko Inc.  50,000  13% 
Mackey Co.  25,000  9%
Nippon Inc.  75,000  14% 
 
a.  12.04%
b.  12.83%
c.  13.07%
d.  15.89%
e.  17.91%
 
Exhibit 1
 
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
 
Asset (A)         Asset (B)
E(RA) = 9%    E(RB) = 11%
(σ_A) = 4%     (σ_B) = 6%
WA = 0.4        WB = 0.6
COVA,B = 0.0011
 
Question 23.

Refer to Exhibit 1. What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (σ_i), covariance (COVi,j), and asset weight (Wi) are as shown above?

a.  8.95%
b.  9.30%
c.  9.95%
d.  10.20%
e.  10.70%

 
Question 24.

Refer to Exhibit 1. What is the standard deviation of this portfolio?
a.  3.68%
b.  4.56%
c.  4.99%
d.  5.16%
e.  6.02% 
 
Question 25.

Consider two securities, A and B. Security A and B have a correlation coefficient of 0.65. Security A has standard deviation of 12, and security B has standard deviation of 25. Calculate the covariance between these two securities.

a.  300
b.  461.54
c.  261.54
d.  195
e.  200
 
Question 26.

Which of the following is not an assumption of the Capital Market Theory?

a.  All investors are Markowitz efficient investors.
b.  All investors have homogeneous expectations.
c.  There are no taxes or transaction costs in buying or selling assets.
d.  All investments are indivisible so it is impossible to buy or sell fractional shares.
e.  All investors have the same one period time horizon.

Question 27.

What does W_RF = -0.50 mean?

a.  The investor can borrow money at the risk-free rate.
b.  The investor can lend money at the current market rate.
c.  The investor can borrow money at the current market rate.
d.  The investor can borrow money at the prime rate of interest.
e.  The investor can lend money at the prime rate of interest.
 
 
Question 28.

When identifying undervalued and overvalued assets, which of the following statements is false?

a.  An asset is properly valued if its estimated rate of return is equal to its required rate of return.
b.  An asset is considered overvalued if its estimated rate of return is below its required rate of return.
c.  An asset is considered undervalued if its estimated rate of return is above its required rate of return.
d.  An asset is considered overvalued if its required rate of return is below its estimated rate of return.
e.  None of the above (that is, all are true statements) 
 
Question 29.

A completely diversified portfolio would have a correlation with the market portfolio that is
a.  Equal to zero because it has only unsystematic risk.
b.  Equal to one because it has only systematic risk.
c.  Less than zero because it has only systematic risk.
d.  Less than one because it has only unsystematic risk.
e.  Less than one because it has only systematic risk.
 
Question 30.

Calculate the expected return for E Services which has a beta of 1.5 when the risk free rate is 0.05 and you expect the market return to be 0.11.

a.  10.6%
b.  12.1%
c.  13.6%
d.  14.0%
e.  16.2%
 
Exhibit 2
 
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
 
           Rates of Return
Year  RAComputer  Market Index
1             13                  17 
2              9                   15 
3            -11                   6
4             10                   8
5             11                   10 
6              6                    12 
 
 Question 31.

Refer to Exhibit 2. Compute the beta for RA Computer using the historic returns presented above.

a.  0.7715
b.  1.2195
c.  1.3893
d.  1.1023
e.  -0.7715


Question 32.

Refer to Exhibit 2. Compute the correlation coefficient between RA Computer and the Market Index.

a.  - 0.32
b.  0.78
c.  0.66
d.  0.58
e.  0.32
 
Question 33.

Refer to Exhibit 2. Compute the intercept of the characteristic line for RA Computer.
a. -9.41
b.  11.63
c.  4.92
d.  -4.92
e.  -7.98
 
 
Question 34.

Refer to Exhibit 2. If you expected return on the Market Index to be 12%, what would you expect the return on RA Computer to be?

a.  7.26%
b.  6.75%
c.  8.00%
d.  9.37%
e.  -3.29% 

Exhibit 3
 
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
 
You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks.
 
                      CURRENT EXPECTED EXPECTED
STOCK   BETA     PRICE  PRICE   DIVIDEND
  X         1.25       $20       $23        $1.25
  Y         1.50       $27       $29        $0.25
  Z         0.90       $35       $38        $1.00 
 
Question 35.

Refer to Exhibit 3. What are the expected (required) rates of return for the three stocks (in the order X, Y, Z)?

a.  16.50%, 5.50%, 22.00%
b.  9.25%, 10.5%, 7.5%
c.  21.25%, 8.33%, 11.43%
d.  6.20%, 2.20%, 8.20%
e.  15.00%, 3.50%, 7.30%
 
 
Question 36.

Refer to Exhibit 3. What are the estimated rates of return for the three stocks (in the order X, Y, Z)?

a.  21.25%, 8.33%, 11.43%
b.  6.20%, 2.20%, 8.20%
c.  16.50%, 5.50%, 22.00%
d.  9.25%, 10.5%, 7.5%
e.  15.00%, 3.50%, 7.30%
 
 
Question 37.

Refer to Exhibit 3. What is your investment strategy concerning the three stocks?

a.  Buy X and Y, sell Z.
b.  Sell X, Y and Z.
c.  Sell X and Z, buy Y.
d.  Buy X, Y and Z.
e.  Buy X and Z, sell Y.


Question 38.

The expected return for Zbrite stock calculated using the CAPM is 15.5%. The risk free rate is 3.5% and the beta of the stock is 1.2. Calculate the implied market risk premium.

a.  5.5%
b.  6.5%
c.  10.0%
d.  15.5%
e.  12.0%
 
Question 39.

Consider the following two factor APT model
     E(R) = λ₀ + λ₁b₁ + λ₂b₂
a.  λ₁ is the expected return on the asset with zero systematic risk.
b.  λ₁ is the expected return on asset 1.
c.  λ₁ is the pricing relationship between the risk premium and the asset.
d.  λ₁ is the risk premium.
e.  λ₁ is the factor loading.
 
Question  40.

In the APT model the idea of riskless arbitrage is to assemble a portfolio that

a.  requires some initial wealth, will bear no risk, and still earn a profit.
b.  requires no initial wealth, will bear no risk, and still earn a profit.
c.  requires no initial wealth, will bear no systematic risk, and still earn a profit.
d.  requires no initial wealth, will bear no unsystematic risk, and still earn a profit.
e.  requires some initial wealth, will bear no systematic risk, and still earn a profit.
 
 
Question  41.

Under the following conditions, what are the expected returns for stocks X and Y?
 
λ₀ = 0.04    b_x,1 = 1.2
k₁ = 0.035  b_x,2 = 0.75
k₂  = 0.045  b_y,1 = 0.65
                   b_y,2 = 1.45
 
a.  11.58% and 12.8%
b.  15.65% and 18.23%
c.  13.27% and 15.6%
d.  18.2% and 16.45%
e.  None of the above
 
Question  42.

The table below provides factor risk sensitivities and factor risk premia for a three factor model for a particular asset where factor 1 is MP the growth rate in U.S. industrial production, factor 2 is UI the difference between actual and expected inflation, and factor 3 is UPR the unanticipated change in bond credit spread.
                       Factor                Risk
Risk Factor    Sensitivity(β)     Premium(λ)
   MP                1.76                0.0259
   UI                 -0.8                -0.0432 
   UPR               0.87               0.0149
 
Calculate the expected excess return for the asset.
a.  12.32%
b.  9.32%
c.  4.56%
d.  6.32%
e.  8.02%

Question 43.

Which of the following statements concerning active equity portfolio management strategies is true?

a.  The goal of active equity portfolio management is to earn a portfolio return that exceeds the return of a passive benchmark portfolio (net of transaction costs) on a risk-adjusted basis.
b.  An actively managed equity portfolio has lower total transaction costs.
c.  An actively managed equity portfolio has lower risk than the passive benchmark.
d.  A key to success for an actively managed equity portfolio is to maximize trading activity.
e.  All of the above
 
 
Question 44.

Which of the following statements is false?

a.  A manager's choice to align with an investment style communicates information to clients about the investor's focus, area of expertise, and stock evaluation methods.
b.  An investment manager's style can not be used as a basis for measuring the manager's performance relative to a benchmark.
c.  Style identification allows an investor to select investment managers that allow his overall portfolio to be properly diversified.
d.  Style investing allows control of the total portfolio to be shared between the investment managers and a knowledgeable sponsor.
e.  None of the above (all are true statements)
 
Question 45.

The following are ways to implement index portfolio investing

a.  Buying shares in index mutual funds
b.  Buying hedge funds.
c.  Buying exchange traded funds
d.  Choices a and b
e.  Choices a and c
 
 
Question 46.

Which of the following statements regarding momentum strategies is true?

a.  Price momentum is a fundamental strategy.
b.  Earnings momentum is a technical strategy.
c.  Price momentum and earnings momentum strategies will often result in identical portfolio strategies and holdings.
d.  The earnings momentum investor will most likely acquire stocks for companies the have positive earnings surprises.
e.  All of the above statements are true
 
 
Question 47.

Funds that normally contain a combination of common stock and fixed income securities are known as

a.  Section 401(k) plans.
b.  Balanced funds.
c.  Contractual plans.
d.  Income funds.
e.  Flexible funds.
 
 
Question 48.

Which of the following is a characteristic of hedge funds?

a.  They are generally less restricted in how and where they can make investments.
b.  They are more liquid than mutual fund shares.
c.  They have no limitations on when and how often investment capital can be contributed or removed.
d.  All of the above.
e.  None of the above.
 
Question 49.

Which of the following is not an example of an alternative asset class?

a.  Hedge funds
b.  Private equity
c.  Real estate
d.  Commodities
e.  All of the above are examples of alternative asset classes.
 
Question 50.

An investment vehicle that acts like a mutual fund of hedge funds, and allows investors access to managers that might otherwise be unavailable is known as

a.  Managed futures funds
b.  Long-short equity funds
c.  Fund of funds
d.  Private equity funds
e.  Leveraged Buyouts (LBOs)