VIEWS: 177 PAGES: 37 POSTED ON: 9/14/2011 Public Domain
ASSET ALLOCATION 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 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. 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. 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) (5 must be stated in terms of expected returns and risk. An investor's tolerance for risk must be established before returns objectives can be stated. a) Investment requirements b) Investment constraints c) Investment rewards d) Investment objectives e) Investment policy 6 _______________ is an appropriate objective for investors who want their portfolio to grow in real terms, i.e., exceed the rate of inflation. a) Capital preservation b) Capital appreciation c) Portfolio growth d) Value additivity e) Nominal preservation 1 7 ___________ 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 8 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 9 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. 10 The asset allocation decision must involve a consideration of a) Cultural differences. b) The objectives stated in the investor's policy statement. c) The types of assets that are appropriate for the investor. d) The risk associated with different investments. e) All of the above. 11 Once the portfolio is constructed, it must be continuously a) Rebalanced. b) Recycled c) Reinvested d) Monitored. e) Manipulated. 2 SELECTING INVESTMENTS IN A GLOBAL MARKET MULTIPLE CHOICE QUESTIONS 1 An investor who purchases a put option: a) Has the right to buy a given stock at a specified price during a designated time period. b) Has the right to sell a given stock at a specified price during a designated time period. c) Has the obligation to buy a given stock at a specified price during a designated time period. d) Has the obligation to sell a given stock at a specified price during a designated time period. e) None of the above. 2 All of the following are considered fixed income investments except a) Corporate bonds. b) Preferred stock. c) Treasury bills, notes, and bonds. d) Money market mutual funds. e) Certificates of deposit (CDs). 3 Capital market instruments include all of the following except a) U.S. Treasury notes and bonds. b) U.S Treasury bills. c) U.S. government agency securities. d) Municipal bonds. e) Corporate bonds. 4 All of the following are considered fixed income securities except a) Debentures. b) Eurobonds. c) Preferred stock. d) Mutual funds. e) Yankee bonds. 5 The purchase and sale of commodities for current delivery and consumption is known as dealing in the _________ market. a) Futures b) Spot c) Money d) Capital e) Options 3 6 An investor who purchases a call option: a) Has the right to buy a given stock at a specified price during a designated time period. b) Has the right to sell a given stock at a specified price during a designated time period. c) Has the obligation to buy a given stock at a specified price during a designated time period. d) Has the obligation to sell a given stock at a specified price during a designated time period. e) None of the above. 7 If this year is consistent with historical trends you would expect the return for small capitalization stocks to be a) Below common stocks and above long-term government bonds. b) Below common stocks and below long-term government bonds. c) Above last year’s return on the same stocks. d) Above common stock, long-term government, and corporate bonds. e) The least variable among long-term bonds and common stocks. 8 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. 9 The best way to directly acquire the shares of a foreign company is through a) International mutual funds. b) Global mutual funds. c) American Depository Receipts. d) Investment in U.S. companies operating internationally. e) Eurobonds. 10 An agreement that provides for the future delivery or receipt of an asset at a specified date for a specified price is a a) Eurobonds contract. b) Futures contract. c) Put option contract. d) Call option contract. e) Warrant contract. 11 Antiques, art, coins, stamps, jewelry, etc., are not included in the investment portfolios of financial institutions because a) Prices vary substantially. 4 b) Transaction costs are relatively high. c) They are illiquid. d) None of the above. e) All of the above. 12 Rank the following four investments in increasing order of historical risk. a) Art, T-bills, corporate bonds, and common stock b) T-bills, common stock, corporate bonds, art c) Corporate bonds, T-bills, common stock, art d) Common stock, corporate bonds, T-bills, art e) T-bills, corporate bonds, common stock, art 13 A statistic that that measures how two variables tend to move together is the a) Coefficient of variation b) Correlation coefficient c) Standard deviation d) Mean e) Variance 14 Which of the following statements concerning historical investment risk and return is false? a) The geometric mean of the rates of return was always lower than the arithmetic mean of the rates of return. b) The rates of return on long-term U.S. government bonds were lower than on stocks. c) Real estate investments consistently provide higher rates of return than those provided by common stock. d) Stocks and bonds experienced results in the middle of the art and antiques series. e). none of the above (that is, all are true statements) (15 Which of the following are reasons that U.S. investors should consider foreign markets when constructing global portfolios. a) Ignoring foreign markets reduced their choices of investment opportunities. b) Foreign markets have low correlations with U.S. markets. c) Returns on non-U.S. stocks can substantially exceed returns for U.S securities. d) All of the above. e) None of the above. 16 For a U.S. based investor, a weaker dollar means that overall dollar based returns on overseas security investment will be higher because a) A weaker dollar means that exports will rise. 5 b) A weaker dollar means that more foreign investors will by U.S. securities. c) A weaker dollar means that the foreign currency will convert to more dollars. d) A weaker dollar means that more investors will purchase the foreign security. e) None of the above. 17 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 18 Convertible bonds are bonds a) That are convertible into more bonds. b) That are convertible from unsecured to secured status. c) That are convertible into company stock. d) That are convertible into specific assets. e) That have an option attached. USE THE FOLLOWING INFORMATION FOR THE NEXT FOUR PROBLEMS Security Annual Percentage Return U.S. government T-bills 3.04 Long-term government bonds 5.75 Long-term corporate bonds 6.80 Large capitalization common stocks 13.50 Small capitalization common stocks 15.60 The annual rate of inflation is 2%. 1 What is the real return on long-term corporate bonds? a) 1.02% b) 3.68% c) 4.71% d) 11.27% e) 13.33% 2 What is the real return on T-bills? a) 1.02% b) 3.68% c) 4.71% d) 11.27% e) 13.33% 6 3 What is the real return on small capitalization stocks? a) 1.02% b) 3.68% c) 4.71% d) 11.27% e) 13.33% 4 What is the real return on large capitalization stocks? a) 1.02% b) 3.68% c) 4.71% d) 11.27% e) 13.33% USE THE FOLLOWING INFORMATION FOR THE NEXT FOUR PROBLEMS Real Returns INVESTMENT REAL ANNUAL RETURN Large company stock 6.50% Small capitalization stock 8.60% Long-term corporate bonds 3.60% Long-term government bonds 2.80% U.S. Treasury bills 1.03% The annual rate of inflation is 2.5% 5 What is the large company stock nominal return? a) 3.56% b) 5.37% c) 6.19% d) 9.16% e) 11.32% 6 What is the T-bill nominal return a) 3.56% b) 5.37% c) 6.19% d) 9.16% e) 11.32% 7 What is the long term Treasury bond nominal return? a) 3.56% b) 5.37% 7 c) 6.19% d) 9.16% e) 11.32% 8 What is the small capitalization stock nominal return? a) 3.56% b) 5.37% c) 6.19% d) 9.16% e) 11.32% 9 A return series has an arithmetic mean of 12.8% and standard deviation of 7.8%. Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 95% of the time? a) 12.8% to 20.6% b) -10.6% to 36.2% c) -2.8% to 28.4% d) -12.8% to 20.6% e) 10.6% to 36.2% 10 A return series has an arithmetic mean of 12.8% and standard deviation of 7.8%. Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 99% of the time? a) 12.8% to 20.6% b) -10.6% to 36.2% c) -2.8% to 28.4% d) -12.8% to 20.6% e) 10.6% to 36.2% 11 A return series has an arithmetic mean of 10.5% and standard deviation of 13%. Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 99% of the time? a) 10.5% to 13% b) -2.5% to 23.5% c) -28.5% to 49.5% d) -15.5% to 36.5% e) 0% to 36.5% 12 A return series has an arithmetic mean of 10.5% and standard deviation of 13%. Assuming the returns are normally distributed what is the range of returns that an investor would expect to receive 95% of the time? 8 a) 10.5% to 13% b) -2.5% to 23.5% c) -28.5 to 49.5% d) -15.5% to 36.5% e) 0% to 10.5% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Given the following annual returns for both Alpine Corporation and Tauber Industries: Alpine's Tauber's Year Rate of Return Rate of Return 1995 5 9 1996 9 16 1997 11 -16 1998 -10 12 1999 12 9 1A Calculate the covariance. a) -32.20 b) -23.32 c) 1.00 d) 23.32 e) 32.20 2A Calculate the coefficient of correlation. a) -0.456 b) -0.354 c) 0.000 d) 0.456 e) 3.538 9 SECURITY MARKET INDICATOR SERIES MULTIPLE CHOICE QUESTIONS 1 Which of the following is not a use of security market indicator series? a) To use as a benchmark of individual portfolio performance b) To develop an index portfolio c) To determine factors influencing aggregate security price movements d) To use in the measurement of systematic risk e) To use in the measurement of diversifiable risk 2 A properly selected sample for use in constructing a market indicator series will consider the sample's source, size and a) Breadth. b) Average beta. c) Value. d) Variability. e) Dividend record. 3 In a price weighted average stock market indicator series, the following type of stock has the greatest influence a) The stock with the highest price b) The stock with the lowest price c) The stock with the highest market capitalization d) The stock with the lowest market capitalization e) The stock with the highest P/E ratio 4 What effect does a stock substitution or stock split have on a price-weighted series? a) Index remains the same, divisor will increase/decrease. b) Divisor remains the same, index will increase/decrease. c) Index and divisor will both remain the same. d) Index and divisor will both reflect the changes (immediately). e) Not enough information is provided. 5 Which of the following is not a value-weighted series? a) NASDAQ Industrial Index 10 b) Dow Jones Industrial Average c) Wilshire 5000 Equity Index d) American Stock Exchange Series e) NASDAQ Composite Index 6 An example of a value weighted stock market indicator series is the a) Dow Jones Industrial Average. b) Nikkei Dow Jones Average. c) S&P 500 Index. d) Value Line Index. e) Lehman Hutton Index. 7 In a value weighted index a) Exchange rate fluctuations have a large impact. b) Exchange rate fluctuations have a small impact. c) Large companies have a disproportionate influence on the index. d) Small companies have an exaggerated effect on the index. e) None of the above 8 Of the following indices, which includes the most comprehensive list of stocks? a) New York Exchange Index b) Standard and Poor’s Index c) American Stock Exchange Index d) NASDAQ Series Index e) Wilshire Equity Index (9 The Value Line Composite Average is calculated using the _______ of percentage price changes. a) arithmetic average b) harmonic average c) expected value d) geometric average e) logarithmic average 10 Which of the following is not a global equity indicator series? a) Morgan Stanley Capital International Indexes b) Dow Jones World Stock Index c) FT/S & P-Actuaries World Indexes d) Merrill Lynch-Wilshire World Indexes e) None of the above (that is, each is a global equity indicator series) 11 Studies of correlations among monthly equity price index returns have found: a) Low correlations between various U.S. equity indexes b) High correlations between various U.S. equity indexes 11 c) High correlations between U.S. and non-U.S. equity indexes d) Negative correlations between various U.S. equity indexes e) None of the above USE THE FOLLOWING INFORMATION FOR THE NEXT THREE PROBLEMS Number of shares Closing Prices (per share) Companies outstanding Day T Day T + 1 1 2,000 $30.00 $25.00 2 7,000 55.00 60.00 3 5,000 20.00 25.00 4 4,000 40.00 45.00 1 Assume that a stock price-weighted indicator consisted of the four issues with their prices. What are the values of the stock indicator for Day T and T + 1 and what is the percentage change? a) 36.25, 38.75, 6.9% b) 38.75, 36.25, -6.9% c) 100, 106.9, 6.9% d) 107.48, 106.33, 1.15% e) None of the above 2 For a value-weighted series, assume that Day T is the base period and the base value is 100. What is the new index value for Day T + 1 and what is the percentage change in the index from Day T? a) 106.33, 6.33% b) 107.48, 7.48% c) 109.93, 9.93% d) 108.7, 8.7% e) None of the above 3 Compute an unweighted price indicator series, using geometric means. What is the percentage change in the index from Day T to Day T+1. Assume a base index value of 100 on Day T. a) 5.35% b) 7.48% c) 9.93% d) 6.33% e) None of the above 12 USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Year % Price Change for GB Industries 2000 10.0% 2001 12.0% 2002 10.0% 2003 11.0% 2004 6.0% 4 Calculate the average annual rate of change for GB Industries for the 5 year period using the arithmetic mean. a) 0.098% b) 9.80% c) 8.50% d) 8.00% e) 89.00% 5 Calculate the average annual rate of change for GB Industries for the 5 year period using the geometric mean. a) 9.7800% b) 0.0978% c) 9.0700% d) 0.0970% e) 3.6400% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Year % Price Change for Stock Index 2000 8.0% 2001 10.0% 2002 -14.0% 2003 20.0% 2004 -10.0% (6 Calculate the average annual rate of change for this index for the 5 year period using the arithmetic mean. a) 0.28% b) 1.28% c) 2.80% d) 3.58% e) 6.38% 13 7 Calculate the average annual rate of change for this index for the 5 year period using the geometric mean. a) 0.09% b) 1.99% c) 3.99% d) 4.50% e) 4.67% MULTIFACTOR MODELS OF RISK AND RETURN MULTIPLE CHOICE QUESTIONS 1 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. 2 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. 3 The equation for the single-index market model is a) RFRit = ai + bRmt + et b) Rit = ai + bRmt + et c) Rit = ai + bRFRt + et 14 d) Rmt = ai + bRit + et e) Rit = ai + b(Rmt – RFRt)+ et 4 The excess return form of the single-index market model is a) Rit = α + b(Rmt – Rit) + eit b) RFRt = α + b(Rmt – RFRt) + eit c) Rit – RFRt = α + b(Rmt) + eit d) Rit = α + b(Rmt – RFRt) + eit e) Rit – RFRt = α + b(Rmt – RFRt) + eit 5 Consider the following list of risk factors: 1. monthly growth in industrial production 2. return on high book to market value portfolio minus return on low book to market value portfolio 3. change in inflation 4. excess return on stock market portfolio 5. return on small cap portfolio minus return on big cap portfolio 6. unanticipated change in bond credit spread Which of the following factors would you use to develop a macroeconomic-based risk factor model a) 1., 2. , and 3. b) 1., 3. and 5. c) 2., 4., and 5. d) 1., 3., and 6. e) 4., 5., and 6. 6 Consider the following list of risk factors: 15 1. monthly growth in industrial production 2. return on high book to market value portfolio minus return on low book to market value portfolio 3. change in inflation 4. excess return on stock market portfolio 5. return on small cap portfolio minus return on big cap portfolio 6. unanticipated change in bond credit spread Which of the following factors would you use to develop a microeconomic-based risk factor model a) 1., 2. , and 3. b) 1., 3. and 5. c) 2., 4., and 5. d) 1., 3., and 6. e) 4., 5., and 6. MULTIPLE CHOICE PROBLEMS 1 Under the following conditions, what are the expected returns for stock X and Y? 0 = 0.04 bx,1 = 1.2 k1 = 0.035 bx,2 = 0.75 k2 = 0.045 by,1 = 0.65 by,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 2 Under the following conditions, what are the expected returns for stock Y and Z? 0 = 0.05 by,1 = 0.75 k1 = 0.06 by,2 = 1.35 k2 = 0.05 bz,1 = 1.5 bz,2 = 0.85 a) 17.61% and 13.23% b) 16.25% and 18.25% c) 13.24% and 28.46% d) 14.83% and 17.69% 16 e) None of the above 3 Under the following conditions, what are the expected returns for stock A and B? 0 = 0.035 ba,1 = 1.00 k1 = 0.05 ba,2 = 1.40 k2 = 0.06 bb,1 = 1.70 bb,2 = 0.65 a) 14.8% and 13.8% b) 19.8% and 29.5% c) 16.0% and 19.8% d) 16.9% and 15.9% e) None of the above 4 Under the following conditions, what are the expected returns for stock X and Y? 0 = 0.05 bx,1 = 0.90 k1 = 0.03 bx,2 = 1.60 k2 = 0.04 by,1 = 1.50 by,2 = 0.85 a) 14.1% and 12.9% b) 12.5% and 19.5% c) 19.5% and 18.5% d) 21.2% and 18.5% e) None of the above 5 Under the following conditions, what are the expected returns for stock A and C? 0 = 0.07 ba,1 = 0.95 k1 = 0.04 ba,2 = 1.10 k2 = 0.03 bc,1 = 1.10 bc,2 = 2.35 a) 14.1% and 17.65% b) 14.1% and 18.45% c) 17.65% and 18.45% d) 18.45% and 17.52% e) None of the above 6 Consider a two-factor APT model where the first factor is changes in the 30-year T-bond rate, and the second factor is the percent growth in GNP. Based on historical estimates you determine that the risk premium for the interest rate factor is 0.02, and the risk premium on the GNP factor is 0.03. For a particular asset, the response coefficient for the interest rate factor is –1.2, and the response coefficient for the GNP factor is 0.80. The rate of return on the zero-beta asset is 0.03. Calculate the expected return for the asset. a) 5.0% b) 2.4% c) -3.0% 17 d) -2.4% e) 3.0% PORTFOLIO MANAGEMENT MULTIPLE CHOICE CONCEPT QUESTIONS 1 When individuals evaluate their portfolios they should evaluate a) All the U.S. and non-U.S. stocks. b) All marketable securities. c) All marketable securities and other liquid assets. d) All assets. e) All assets and liabilities. 2 The probability of an adverse outcome is a definition of a) Statistics. b) Variance. c) Random. d) Risk. e) Semi-variance above the mean. 3 The Markowitz model is based on several assumptions regarding investor behavior. Which of the following is not such any assumption? a) Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period. b) Investors maximize one-period expected utility. c) Investors estimate the risk of the portfolio on the basis of the variability of expected returns. d) Investors base decisions solely on expected return and risk. e) None of the above (that is, all are assumptions of the Markowitz model) 4 Markowitz believes that any asset or portfolio of assets can be described by ________ parameter(s). a) One b) Two c) Three d) Four e) Five 5 Semivariance, when applied to portfolio theory, is concerned with a) The square root of deviations from the mean. b) All deviations below the mean. c) All deviations above the mean. 18 d) All deviations. e) The summation of the squared deviations from the mean. 6 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 7 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. 8 Which of the following statements about the correlation coefficient is false? a) The values range between -1 to +1. b) A value of +1 implies that the returns for the two stocks move together in a completely linear manner. c) A value of -1 implies that the returns move in a completely opposite direction. d) A value of zero means that the returns are independent. e) None of the above (that is, all statements are true) 10 Given a portfolio of stocks, the envelope curve containing the set of best possible combinations is known as the a) Efficient portfolio. b) Utility curve. c) Efficient frontier. d) Last frontier. e) Capital asset pricing model. 11 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 12 The optimal portfolio is identified at the point of tangency between the efficient frontier and the 19 a) highest possible utility curve. b) lowest possible utility curve. c) middle range utility curve. d) steepest utility curve. e) flattest utility curve. 13 An individual investor’s utility curves specify the tradeoffs he or she is willing to make between a) high risk and low risk assets. b) high return and low return assets. c) covariance and correlation. d) return and risk. e) efficient portfolios. 14 A portfolio manager is considering adding another security to his portfolio. The correlations of the 5 alternatives available are listed below. Which security would enable the highest level of risk diversification a) 0.0 b) 0.25 c) -0.25 d) -0.75 e) 1.0 15 A positive covariance between two variables indicates that a) the two variables move in different directions. b) the two variables move in the same direction. c) the two variables are low risk. d) the two variables are high risk. e) the two variables are risk free. MULTIPLE CHOICE PROBLEMS 1 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 2 Between 1994 and 2004, the standard deviation of the returns for the S&P 500 and the NYSE indexes were 0.27 and 0.14, respectively, and the covariance of these index 20 returns was 0.03. What was the correlation coefficient between the two market indicators? a) 1.26 b) 0.7937 c) 0.2142 d) 0.1111 e) 0.44 3 Between 1980 and 1990, the standard deviation of the returns for the NIKKEI and the DJIA indexes were 0.19 and 0.06, respectively, and the covariance of these index returns was 0.0014. What was the correlation coefficient between the two market indicators? a) 8.1428 b) 0.0233 c) 0.0073 d) 0.2514 e) 0.1228 4 Between 1975 and 1985, the standard deviation of the returns for the NYSE and the S&P 500 indexes were 0.06 and 0.07, respectively, and the covariance of these index returns was 0.0008. What was the correlation coefficient between the two market indicators? a) .1525 b) .1388 c) .1458 d) .1905 e) .1064 5 Between 1986 and 1996, the standard deviation of the returns for the NYSE and the DJIA indexes were 0.10 and 0.09, respectively, and the covariance of these index returns was 0.0009. What was the correlation coefficient between the two market indicators? a) .1000 b) .1100 c) .1258 d) .1322 e) .1164 6 Between 1980 and 2000, the standard deviation of the returns for the NIKKEI and the DJIA indexes were 0.08 and 0.10, respectively, and the covariance of these index returns was 0.0007. What was the correlation coefficient between the two market indicators? a) .0906 b) .0985 c) .0796 21 d) .0875 e) .0654 7 What is the expected return of the three stock portfolio described below? Common Stock Market Value Expected Return Ando Inc. 95,000 12.0% Bee Co. 32,000 8.75% Cool Inc. 65,000 17.7% a) 18.45% b) 12.82% c) 13.38% d) 15.27% e) 16.67% 8 What is the expected return of the three stock portfolio described below? Common Stock Market Value Expected Return Xerox 125,000 8% Yelcon 250,000 25% Zwiebal 175,000 16% a) 18.27% b) 14.33% c) 16.33% d) 12.72% e) 16.45% 9 What is the expected return of the three stock portfolio described below? Common Stock Market Value Expected Return Alko Inc. 25,000 38% Belmont Co. 100,000 10% Cardo Inc. 75,000 16% a) 21.33% b) 12.50% c) 32.00% d) 15.75% e) 16.80% 10 What is the expected return of the three stock portfolio described below? Common Stock Market Value Expected Return Delton Inc. 50,000 10% Efley Co. 40,000 11% Grippon Inc. 60,000 16% a) 14.89% 22 b) 16.22% c) 12.66% d) 13.85% e) 16.99% 11 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% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Asset (A) Asset (B) E(RA) = 10% E(RB) = 15% (A) = 8% (B) = 9.5% WA = 0.25 WB = 0.75 CovA,B = 0.006 12 What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (i), covariance (COVi,j), and asset weight (Wi) are as shown above? a) 8.79% b) 12.5% c) 13.75% d) 7.72% e) 12% 13 What is the standard deviation of this portfolio? a) 8.79% b) 13.75% c) 12.5% d) 7.72% e) 5.64% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Asset (A) Asset (B) E(RA) = 25% E(RB) = 15% (A) = 18% (B) = 11% 23 WA = 0.75 WB = 0.25 COVA,B = -0.0009 14 What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (i), covariance (COVi,j), and asset weight (Wi) are as shown above? a) 18.64% b) 20.0% c) 22.5% d) 13.65% e) 11% 15 What is the standard deviation of this portfolio? a) 5.45% b) 18.64% c) 20.0% d) 22.5% e) 13.65% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Asset (A) Asset (B) E(RA) = 9% E(RB) = 11% (A) = 4% (B) = 6% WA = 0.4 WB = 0.6 COVA,B = 0.0011 16 What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (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% 17 What is the standard deviation of this portfolio? a) 3.68% b) 4.56% c) 4.99% d) 5.16% e) 6.02% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Asset (A) Asset (B) E(RA) = 10% E(RB) = 8% 24 (A) = 6% (B) = 5% WA = 0.3 WB = 0.7 COVA,B = 0.0008 18 What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (i), covariance (COVi,j), and asset weight (Wi) are as shown above? a) 8.6% b) 8.1% c) 9.3% d) 10.2% e) 11.6% 19 What is the standard deviation of this portfolio? a) 5.02% b) 3.88% c) 6.21% d) 4.04% e) 4.34% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Asset (A) Asset (B) E(RA) = 8% E(RB) = 15% (A) = 7% (B) = 10% WA = 0.4 WB = 0.6 COVA,B = 0.0006 20 What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (i), covariance (COVi,j), and asset weight (Wi) are as shown above? a) 8.0% b) 12.2% c) 7.4% d) 9.1% e) 11.6% 21 What is the standard deviation of this portfolio? a) 3.89% b) 4.61% c) 5.02% d) 6.83% e) 6.09% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Asset (A) Asset (B) E(RA) = 16% E(RB) = 10% 25 (A) = 9% (B) = 7% WA = 0.5 WB = 0.5 COVA,B = 0.0009 22 What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (i), covariance (COVi,j), and asset weight (Wi) are as shown above? a) 10.6 % b) 10.2% c) 13.0% d) 11.9% e) 14.0% 23 What is the standard deviation of this portfolio? a) 6.08% b) 5.89% c) 7.06% d) 6.54% e) 7.26% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Asset (A) Asset (B) E(RA) = 7% E(RB) = 9% (A) = 6% (B) = 5% WA = 0.6 WB = 0.4 COVA,B = 0.0014 24 What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (i), covariance (COVi,j), and asset weight (Wi) are as shown above? a) 5.8% b) 6.1% c) 6.9% d) 7.8% e) 8.9% 25 What is the standard deviation of this portfolio? a) 4.87% b) 3.62% c) 4.13% d) 5.76% e) 6.02% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Asset (A) Asset (B) 26 E(RA) = 10% E(RB) = 14% (A) = 7% (B) = 8% WA = 0.7 WB = 0.3 COVA,B = 0.0013 26 What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (i), covariance (COVi,j), and asset weight (Wi) are as shown above? a) 6.4% b) 9.1% c) 10.2% d) 10.8% e) 11.2% 27 What is the standard deviation of this portfolio? a) 4.51% b) 5.94% c) 6.75% d) 7.09% e) 8.62% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Asset (A) Asset (B) E(RA) = 18% E(RB) = 13% (A) = 7% (B) = 6% WA = 0.3 WB = 0.7 COVA,B = 0.0011 28 What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (i), covariance (COVi,j), and asset weight (Wi) are as shown above? a) 10.10% b) 11.60% c) 13.88% d) 14.50% e) 15.37% 29 What is the standard deviation of this portfolio? a) 5.16% b) 5.89% c) 6.11% d) 6.57% e) 7.02% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Asset (A) Asset (B) 27 E(RA) = 16% E(RB) = 14% (A) = 3% (B) = 8% WA = 0.5 WB = 0.5 COVA,B = 0.0014 30 What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (i), covariance (COVi,j), and asset weight (Wi) are as shown above? a) 11% b) 12% c) 13% d) 14% e) 15% 31 What is the standard deviation of this portfolio? a) 3.02% b) 4.88% c) 5.24% d) 5.98% e) 6.52% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Asset 1 Asset 2 E(R1) = 0.28 E(R2) = 0.12 E(1) = 0.15 E(2) = 0.11 W1 = 0.42 W2 = 0.58 r1,2 = 0.7 32 Calculate the expected return of the two stock portfolio. a) 0.107 b) 0.1367 c) 0.1169 d) 0.1872 e) 0.20 33 Calculate the expected standard deviation of the two stock portfolio. a) 0.1367 b) 0.1872 c) 0.1169 d) 0.20 e) 0.3950 USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Asset 1 Asset 2 28 E(R1) = .12 E(R2) = .16 E(1) = .04 E(2) = .06 34 Calculate the expected return and expected standard deviation of a two stock portfolio when r1,2 = - .60 and w1 = .75. a) .13 and .0024 b) .13 and .0455 c) .12 and .0585 d) .12 and .5585 e) .13 and .6758 35 Calculate the expected returns and expected standard deviations of a two stock portfolio when r1,2 = .80 and w1 = .60. a) .144 and .0002 b) .144 and .0018 c) .136 and .0045 d) .136 and .0455 e) .136 and .4554 36 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 37 Calculate the expected return for a three asset portfolio with the following Asset Exp. Ret. Std. Dev Weight A 0.0675 0.12 0.25 B 0.1235 0.1675 0.35 C 0.1425 0.1835 0.40 a) 11.71% b) 11.12% c) 15.70% d) 14.25% e) 6.75%. 29 EVALUATION OF PORTFOLIO PERFORMANCE 1 The major requirements of a portfolio manager include the following, except a) Follow the client's policy statement. b) Completely diversify the portfolio to eliminate all unsystematic risk. c) The ability to derive above-average risk adjusted returns. d) Completely diversify the portfolio to eliminate all systematic risk. e) None of the above (that is, all are requirements of a portfolio manager) 2 Treynor showed that rational, risk-averse investors always prefer portfolio possibility lines that have a) Zero slopes. b) Slightly negative slopes. c) Highly negative slopes. d) Slightly positive slopes. e) Highly positive slopes. 3 Sharpe's performance measure divides the portfolio's risk premium by the a) Standard deviation of the rate of return. b) Variance of the rate of return. c) Slope of the fund's characteristic line. d) Beta. e) Risk free rate. 4 Which measure of portfolio performance allows analysts to determine the statistical significance of abnormal returns? a) Sharpe measure b) Jensen measure c) Fama measure 30 d) Treynor measure e) None of the above 5 If the return increases as more global investments with low correlation are added to the market portfolio, the efficient frontier moves a) Up and right. b) Up and left. c) Down and right. d) Down and left. e) Up only. 6 Information ratio portfolio performance measures a) Adjust portfolio risk to match benchmark risk. b) Compare portfolio returns to expected returns under CAPM. c) Evaluate portfolio performance on the basis of return per unit of risk. d) Indicate historic average differential return per unit of historic variability of differential return. e) None of the above. 7 Relative return portfolio performance measures a) Adjust portfolio risk to match benchmark risk. b) Compare portfolio returns to expected returns under CAPM. c) Evaluate portfolio performance on the basis of return per unit of risk. d) Indicate historic average differential return per unit of historic variability of differential return. e) None of the above. 8 Excess return portfolio performance measures a) Adjust portfolio risk to match benchmark risk. b) Compare portfolio returns to expected returns under CAPM. c) Evaluate portfolio performance on the basis of return per unit of risk. d) Indicate historic average differential return per unit of historic variability of differential return. e) None of the above. 9 For a poorly diversified portfolio the appropriate measure of portfolio performance would be a) The Treynor measure because it evaluates portfolio performance on the basis of return and diversification. b) The Sharpe measure because it evaluates portfolio performance on the basis of return and diversification. c) The Treynor measure because it uses standard deviation as the risk measure. d) The Sharpe measure because it uses beta as the risk measure. e) None of the above. 10 Which of the following statements concerning performance measures is false? a) The Sharpe measure examines both unsystematic and systematic risk. 31 b) The Treynor measure examines systematic risk. c) The Jensen measure examines systematic risk. d) All three measures examine both unsystematic and systematic risk. e) None of the above (that is, all statements are true) 11 A manager's superior returns could have occurred due to: a) an insightful asset allocation strategy, over weighting an asset class that earned high returns. b) investing in undervalued sectors. c) selecting individual securities that earned above average returns. d) Choices a and c e) All of the above USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS The portfolios identified below are being considered for investment. During the period under consideration Rf = .03. Portfolio Return Beta A 0.16 1.0 0.15 B 0.22 1.5 0.10 C 0.11 0.6 0.08 D 0.18 1.1 0.12 1 Using the Sharpe Measure, which portfolio performed best? a) A b) B c) C d) D e) Two portfolios are tied 2 According to the Treynor Measure, which portfolio performed best? a) A b) B c) C d) D e) Two portfolios are tied USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS The portfolios identified below are being considered for investment. Assume that during the period under consideration Rf = .04. Portfolio Return Beta 32 W 0.18 1.8 0.06 X 0.21 0.9 0.10 Y 0.13 0.7 0.03 Z 0.16 1.5 0.07 3 Using the Sharpe Measure, which portfolio performed best? a) W b) X c) Y d) Z e) Two portfolios are tied 4 According to the Treynor Measure, which portfolio performed best? a) W b) X c) Y d) Z e) Two portfolios are tied USE THE FOLLOWING INFORMATION FOR THE NEXT THREE PROBLEMS Consider the data presented below on three mutual funds and the market. Standard Fund Beta Deviation (%) Return (%) Rf (%) AAA 0.75 7.0 14 3 BBB 1.05 5.0 18 3 CCC 0.89 8.0 20 3 Market 1.00 8.0 12 3 5 Compute the Sharpe Measure for the AAA fund. a) 4.49 b) 2.74 c) 1.57 d) 1.70 e) 1.27 6 Compute the Jensen Measure for the BBB fund. a) 4.49 b) 2.74 c) 4.25 d) 5.55 e) 8.99 33 7 Compute the Treynor Measure for the CCC fund. a) 14.7 b) 15.3 c) 19.1 d) 17.0 e) 12.7 34 USE THE FOLLOWING INFORMATION FOR THE NEXT THREE PROBLEMS The data presented below has been collected at this point in time. Standard Fund Beta Deviation (%) Return (%) Rf (%) AAA 1.05 4.98 16 6 BBB 1.00 4.04 15 6 CCC 0.92 3.13 11 6 Market 1.00 3.75 13 6 8 Compute the Sharpe Measure for the AAA fund. a) 2.01 b) 2.74 c) 2.91 d) 5.43 e) 1.72 9 Compute the Jensen Measure for the BBB fund. a) 2.10 b) 2.74 c) 5.43 d) 2.00 e) 1.65 10 Compute the Treynor Measure for the CCC fund. a) 5.43 b) 2.74 c) 2.19 d) 2.00 e) 1.65 USE THE FOLLOWING INFORMATION FOR THE NEXT THREE PROBLEMS The data presented below has been collected at this point in time. Standard Fund Beta Deviation (%) Return (%) Rf (%) XXX 1.07 5.13 19 6 YYY 1.02 4.28 17 6 ZZZ 0.86 3.52 12 6 Market 1.00 3.80 13 6 11 Compute the Sharpe Measure for the XXX fund. a) 6.98 b) 2.35 c) 2.53 d) 3.86 e) 1.72 35 12 Compute the Jensen Measure for the YYY fund. a) 6.98 b) 2.35 c) 2.53 d) 3.86 e) 1.72 13 Compute the Treynor Measure for the ZZZ fund. a) 6.98 b) 2.35 c) 2.53 d) 3.86 e) 1.72 Given the following information evaluate the performance of Cloud Incorporated (CI). RCI = 0.17 BCI = 1.05 Rf = 0.07 Rm = 0.12 14 Calculate CI's risk. a) 0.1225 b) 0.1000 c) 0.0525 d) 0.0475 e) 0.0325 Given the following information evaluate the performance of Tyler Incorporated (TI). RTI = 0.18 BTI = 1.06 Rf = 0.06 Rm = 0.11 15 Calculate TI's risk. a) 0.0113 b) 0.1200 c) 0.0670 d) 0.0530 e) 0.0696 THE FOLLOWING INFORMATION IS FOR THE NEXT THREE PROBLEMS Consider the following information for four portfolios, the market and the risk free rate (RFR) Portfolio Return Beta SD A1 0.15 1.25 0.182 36 A2 0.1 0.9 0.223 A3 0.12 1.1 0.138 A4 0.08 0.8 0.125 Market 0.11 1 0.2 RFR 0.03 0 0 16 Calculate the Sharpe Measure for each portfolio a) A1=0.40, A2=0.31, A3=0.65, A4=0.66 b) A1=0.31, A2=0.66, A3=0.65, A4=0.40 c) A1=0.66, A2=0.65, A3=0.31, A4=0.40 d) A1=0.66, A2=0.31, A3=0.65, A4=0.40 e) None of the above 17 Calculate the Jensen alpha Measure for each portfolio a) A1=0.014, A2=-0.002, A3=0.002, A4=-0.02 b) A1=0.002, A2=-0.02, A3=0.002, A4=-0.014 c) A1=0.02, A2=-0.002, A3=0.002, A4=-0.014 d) A1=0.02, A2=-0.002, A3=0.02, A4=-0.14 e) None of the above 18 Calculate the Treynor Measure for each portfolio a) A1=0.0625, A2=0.0778, A3=0.0818, A4=0.096 b) A1=0.096, A2=0.0778, A3=0.0818, A4=0.0625 c) A1=0.096, A2=0.0818, A3=0.0778, A4=0.0625 d) A1=0.0778, A2=0.096, A3=0.0818, A4=0.0625 e) None of the above 37