TEST BANK FOR SATURDAY CLASS

Test bank for Portfolio Management

Chapter One

The Process of Portfolio Management

B 1. Classical security analysis is sometimes called

a. ABC analysis

b. EIC analysis

c. GBY analysis

d. CPI analysis

2. The modern trend in investments is to ______ security analysis and ______ portfolio management.

a. emphasize, emphasize

b. emphasize, de-emphasize

c. de-emphasize, emphasize

d. de-emphasize, de-emphasize

3. Portfolio management is primarily concerned with

a. increasing return

b. reducing risk

c. predicting the future

d. explaining the past

4. Most of the academic literature of the past two decades has supported the

a. arbitrage pricing theory

b. benefits of high PE stocks

c. usefulness of stock charts

d. efficient markets paradigm

5. “The lower the dispersion in returns, the greater the accumulated value of otherwise equal investments.” This statement is

a. true

b. false

c. true for the short run, but not necessarily true for the long run

d. true for the long run, but not necessarily true for the short run

6. ______ is cheap in the investment business.

a. Risk

b. Return

c. Time

d. Talk C B D A D

Test bank for Portfolio Management

A 7. Which of the following is a key concept in finance?

a. A dollar today is worth more than a dollar tomorrow

b. Regardless of anything else, the higher the stock price, the better

c. Regardless of anything else, the lower the risk, the better

d. Risk averse people will not take a risk

8. Understanding ______ is essential to bond portfolio management.

a. convexity

b. duration

c. semi-variance

d. bond betas

9. According to the book, the first step in portfolio management is

a. setting portfolio objectives

b. formulating an investment strategy

c. learning the basic principles of finance

d. having a game plan for portfolio revision

10. A portfolio should have both ______ and ______ objective.

a. a short term, a long term

b. a primary, a secondary

c. an initial, a final

d. an explicit, an implicit

11. One of the most consequential bits of academic research regarding portfolio construction is a paper by

a. Evans and Archer

b. Andrew and McLaughlin

c. Lawrence and Philippatos

d. Miles and Ezzell

12. ______ is a topic in this textbook that most others omit.

a. Real estate

b. Security screening

c. Performance evaluation

d. Principles of the futures market

13. Real assets discussed in this book include

a. art

b. rare coins

c. timberland

d. diamonds B C B A B C

Test bank for Portfolio Management

D 14. Which of the following is a popular means of increasing income from a

portfolio?

a. Selling bonds

b. Selling stock short

c. Buying put options

d. Option overwriting

15. Portfolio protection was called ______ until the stock market crash in 1987.

a. portfolio insurance

b. portfolio hedging

c. dynamic hedging

d. arbitrage

16. In this text, the chapter on contemporary issues includes all of the following EXCEPT

a. tactical asset allocation

b. stock lending

c. program trading

d. put-call parity

17. A stock is a good investment if the company is

a. well-run

b. in a growing industry

c. poorly run but the stock is underpriced

d. extremely popular among investors

18. As an introduction, the two key concepts in finance are

a. buy low and sell high

b. the time value of money and adjustment for risk

c. be patient, but strike when the time is right

d. manage earnings and save judiciously

19. According to Chapter 1, should investors invest in stocks today?

a. Yes, because it can be a costly decision to try to time the market

b. Yes, because the economy looks good now

c. No, because the market is too high now

d. No, because the market is too volatile now

Chapter Two

Valuation, Risk, Return, and Uncertainty A D C B A

Test bank for Portfolio Management

A 1. An ordinary annuity is a _____ series of _____ cash.

a. finite, constant

b. finite, growing

c. infinite, constant

d. infinite, growing

2. The winner of a state lottery usually receives a(n)

a. ordinary annuity

b. annuity due

c. growing annuity

d. perpetuity

3. Using a discount rate of 8% per year, what is the present value of an ordinary annuity of $100 per year for 10 years?

a. $1,000

b. $671

c. $887

d. $557

4. Using a discount rate of 8% per year, what is the present value of an annuity due of $100 per year with 10 payments?

a. $725

b. $559

c. $793

d. $772

5. Using a discount rate of 8% per year (compounded quarterly), what is the present value of an ordinary annuity of $100 per year for 10 years?

a. $726

b. $662

c. $811

d. $684

e.

6. A perpetual cash flow stream makes its first payment of $500 in one year. Using a 7% annual discount rate and a 3% growth rate in the value of subsequent payments, what is the present value of this growing perpetuity?

a. $2,000

b. $20,000

c. $12,500

d. $125,000 B B A D C

Test bank for Portfolio Management

B 7. A perpetuity makes annual payments of $250. The perpetuity is valued using a

10% discount rate. What is the value of the perpetuity if the first payment is made immediately?

a. $2,500

b. $2,750

c. $25,000

d. $2,525

8. The fact that most investors are risk averse means they will

a. only take risks for which they are properly rewarded

b. not take a risk

c. not voluntarily take a risk

d. not take a risk unless they know the outcome in advance

9. Which of the following statements is true?

a. Some people are risk averse and others are not

b. Some people are more risk averse than others

c. Risk averse people will not take a risk

d. Risk averse people are willing to settle for less return than risk neutral

people

10. Risk must involve

a. a chance of loss

b. an unknown probability distribution

c. actual dollars

d. negative expected returns

11. Overall variability of returns is called

a. systematic risk

b. unsystematic risk

c. total risk

d. undiversifiable risk A B A C

B 12. Risk is often measured as

a. central tendency of returns

b. dispersion of returns

c. expected value of returns

d. possibility of negative returns

Test bank for Portfolio Management

A 13. Riskier securities have _____ returns.

a. higher expected

b. lower realized

c. higher instantaneous

d. lower long-term

14. The market rewards investors for bearing _____risk.

a. diversifiable

b. undiversifiable

c. unsystematic

d. total

15. The diminishing marginal utility of money explains why

a. some stocks sell for more than others

b. most people will not take a fair bet

c. people view the stock market as risky

d. people tend to pay too much

16. The text described an example of the diminishing marginal utility of money with a statement made by a _____ player.

a. hockey

b. football

c. tennis

d. basketball

17. Individual investment behavior is more a function of _____ than _____.

a. risk, expected return

b. expected return, utility

c. utility, expected return

d. expected return, risk

18. The St. Petersburg paradox explains why

a. some stocks sell for more than others

b. most people will not take a fair bet

c. people view the stock market as risky

d. people tend to pay too much

19. In economic theory, if money is not saved, it is

a. consumed

b. invested

c. unrealized

d. deferred B B C C B A

Test bank for Portfolio Management

D 20. Wearing a Rolex watch is an example of someone getting

a. psychic return

b. utility

c. satisfaction

d. all of the above

21. Two large classes of risk are

a. systematic and undiversifiable

b. price and convenience

c. realized and psychic

d. market and intermarket

22. Individual consumption decisions are a major factor in determining

a. credit ratings of corporations

b. dividend rates

c. market interest rates

d. levels of perceived risk

23. If a stock has a higher than average expected return, you would logically

expect it is

a. widely held by investors

b. riskier than average

c. in an industry with good prospects

d. a well-managed company

24. What is the present value of a growing perpetuity with an initial cash flow of

1000 (C0), a growth rate of 3% per year (g), and a required rate of return of 8% (R)? a. $7777.64

b. $12,500

c. $20,000

d. $20,600

25. Most investors would not be interested in a fair bet because

a. they would be concerned whether it is really fair

b. investors do not willingly take a risk when it is possible to lose money

c. losing a given amount of money would reduce utility more than winning

the same amount would increase utility

d. they accept only bets with a sure outcome B C B D C

Test bank for Portfolio Management

B 26. The holding period return is calculated as

P1 P0 P0

P P incomeb. 10 P0

P P incomec. 01 P0

P P incomed. 10 P0a.

C 27. You bought 100 shares of stock at $35, received $3 per share in dividends,

and sold the shares for $50. Your holding period return is

a. 36%

b. $1,503

c. 51.4%

d. $5,300

28. Which of the following is true of the holding period return?

a. It considers the time value of money

b. It is independent of the passage of time

c. It explicitly considers risk

d. It only considers capital gains or losses

29. A holding period return should only be compared with returns calculated

a. over shorter periods

b. over longer periods

c. over periods of the same length

d. over periods of the same length or less

30. A stock's return is 15.5%. The return relative is

a. 0.845

b. -0.845

c. 0.155

d. 1.155

31. Return relatives are calculated primarily to deal with the potential problem of

a. changing returns

b. large returns

c. zero returns

d. negative returns B C D D

Test bank for Portfolio Management

A 32. A stock has monthly returns of 4%, 5%, 2%, and -3%. Its arithmetic average

return is

a. 2%

b. 3%

c. 4%

d. 5%

33. A stock has monthly returns of 4%, 5%, 2%, and -3%. Its geometric average return is

a. 1.9%

b. 2.1%

c. 3.3%

d. cannot be determined

34. You buy a stock for $50 per share. Over the next four months, it has monthly returns of 4%, 5%, 2%, and -3%. The value of a share at the end of the fourth month is

a. $51.20

b. $54.02

c. $54.12

d. $56.45

35. Suppose a stock pays no dividends. Another method of calculating the return relative is

P1 P0

Pb. 0 P1

P Pc. 10 P0

P Pd. 01 P1 A B A a.

A 36. The arithmetic mean is always _______ the geometric mean.

a. greater than or equal to

b. greater than

c. less than or equal to

d. less than

Test bank for Portfolio Management

A 37. The _____ the dispersion in a series of numbers, the ____ the gap between the

arithmetic and geometric mean.

a. greater, greater

b. greater, smaller

c. smaller, greater

d. more predictable, less predictable

38. Technically, _____ refers to the past; _____ refers to the future.

a. return, expected return

b. realized return, return

c. return relative, return

d. return, return relative

39. According to the book, which of the following terms can mean different things to different people?

a. Return on assets

b. Return on equity

c. Return on investment

d. Return of principal

40. The use of _____ can dramatically affect an investor's return.

a. historical data

b. leverage

c. arithmetic averages

d. variance calculations

41. Total risk can be measured by all of the following EXCEPT

a. variance

b. standard deviation

c. semi-variance

d. arithmetic mean

42. The variance of x is 25. What is the variance of 2x?

a. 25

b. 50

c. 75

d. 100

43. Semi-variance only considers

a. extreme variation

b. adverse variation

c. unexpected variation

d. anticipated variation A C B D D B

Test bank for Portfolio Management

C 44. Discrete random variables are _____; continuous random variables are

______.

a. quantifiable, unquantifiable

b. objective, subjective

c. counted, measured

d. dependent, independent

45. A variable whose value is based on the value of other variables is a(n)

a. independent variable

b. dependent variable

c. stochastic variable

d. estimated variable

46. Random variables reside in a

population

a. sample

b. continuous set

c. discrete set

47. A jar contains a mixture of coins; you need a quarter. From your perspective, the distribution of coins in the jar is

univariate

a. bivariate

b. trivariate

c. multivariate

48. If a distribution shows more possible outcomes on one side of the mean than the other, the distribution shows

a. uniformity

b. normal characteristics

c. random characteristics

d. skewness

49. A coin-flipping experiment in which you measure heads or tails takes observations from a _____ distribution.

a. chi-square

b. exponential

c. Poisson

d. binomial B A A D D

Test bank for Portfolio Management

D 50. Which of the following is a measure of central tendency?

a. Skewness

b. Variance

c. Kurtosis

d. Mean

51. The expected value of a random variable is also called the

a. skewness

b. variance

c. kurtosis

d. mean

52. A jar contains 100 quarters, 50 dimes, and 50 nickels. What is the expected value of a single observation from this coin population?

a. $0.375

b. $0.200

c. $0.133

d. $0.163

53. Which of the following can help reduce the effect of outliers?

a. Rounding

b. Regression

c. Interpolation

d. Logarithms

54. The expected value of x is 5%. What is E(6x)?

a. 0.833%

b. 5%

c. 30%

d. Cannot be determined

55. The correlation coefficient is equal to

a. ~~,bcov(a) D D D C A

a b~~,b) a b b. cov(a

c. ~~,bcov(a) a

d. 1 [

~~,bcov(a) b ] a b

Test bank for Portfolio Management

A 56. The minimum value of the correlation coefficient is

a. -1

b. 0

c. +1

d. there is no minimum value

57. The minimum value of covariance is

a. -1

b. 0

c. +1

d. there is no minimum value

58. R squared is a measure of

a. goodness of fit

b. partial dispersion

c. central tendency

d. skewness

59. A sample of 100 observations has a standard deviation of 25. What is the standard error?

a. 5

b. 2.5

c. .25

d. Cannot be determined

60. A sample of 100 observations has a standard deviation of 25 and a mean of 75. What is the 95% confidence interval?

a. 50 75

b. 73 77

c. 70 80

d. 74.5 75.5

61. The expected return on A is 12%; the expected return on B is 15%. What is the expected return of a portfolio that contains one-third A and the remainder B?

a. 12%

b. 14%

c. 15%

d. 13.5% D A B C B

Test bank for Portfolio Management

A 62. A tilde (~) over a symbol indicates it is a

a. random variable

b. constant

c. continuous random variable

d. discrete random variable

63. If two securities are negatively correlated, their covariance is

a. positive

b. negative

c. zero

d. cannot be determined

64. The covariance between a random variable and a constant is

a. negative

b. positive

c. zero

d. non-negative

65. Return is the

a. benefit associated with an investment

b. realized gain from an investment

c. realized and unrealized gain from an investment

d. measurable gain from an investment

66. Assume the risk-free rate is constant over time. The correlation between the return on security x and the return on the risk-free asset is

a. negative

b. positive

c. zero

d. cannot be determined without further information

67. The correct method for measuring the average return over several periods in the past is with a(n)

a. geometric mean

b. arithmetic mean

c. statistical mean

d. multiple variation mean

68. Using semivariance to measure risk is appropriate if the return distribution is

a. symmetrical

b. not symmetrical

c. normally distributed

d. uniformly distributed B C A C A B

Test bank for Portfolio Management

C 69. The median of a distribution is the

a. arithmetic average

b. geometric average

c. point where half of the observations lie on either side

d. value that occurs most frequently

70. If the variance of x is 0.10, what is the variance of 2x?

a. 0.05

b. 0.10

c. 0.20

d. 0.40

71. If the standard deviations of Stock A and B are 0.20 and 0.30 respectively and the COV(A,B) equals 0.012, what is the correlation coefficient?

a. 0.00072

b. 0.20

c. 0.30

d. 2

Chapter Three

Setting Portfolio Objectives

1. Two dominant factors contributing to a successful investment program are

a. suitable investment objectives and policy, and successful managers

b. suitable investment objectives and risk assessment

c. successful managers and successful income generation

d. accurate risk assessment and measurement of historical return

2. To an investment professional, which of the following provides no growth?

a. Real estate

b. Savings accounts

c. Common stock

d. Corporate bonds

3. With bequests, a semantic problem sometimes develops with regard to the meaning of the terms

a. growth and income

b. principal and interest

c. risk and return

d. present value and future value D B A B B

Test bank for Portfolio Management

D 4. A good example of the issue of multiple portfolio beneficiaries is found in

people

a. who want income and those who want growth

b. who are risk averse and those who are not

c. who pay taxes and those who do not

d. today and people tomorrow

5. Which of the following deals with decisions that have been made about long-term investment activities, eligible investment categories, and the allocation of funds among the eligible investment categories?

a. Investment policy

b. Investment strategy

c. Investment tactics

d. Investment standards

6. All of the following are principal portfolio objectives EXCEPT

a. stability of principal

b. capital appreciation

c. growth and income

d. income

7. If someone wants no chance of a loss of principal value, the appropriate primary objective is

a. stability of principal

b. income

c. growth of income

d. capital appreciation

8. If someone is concerned about inflation eroding purchasing power of regular income, the appropriate primary objective is

a. stability of principal

b. income

c. growth of income

d. capital appreciation

9. A young, well-paid professional is best suited, on average, to which primary objective?

a. Stability of principal

b. Income

c. Growth of income

d. Capital appreciation A C A C D

Test bank for Portfolio Management

D 10. In the early years, which primary objective generally results in the least

income?

a. Stability of principal

b. Income

c. Growth of income

d. Capital appreciation

11. A growth-of-income objective

a. sacrifices some current return for some purchasing power protection

b. generates maximum income as soon as possible

c. makes only sparing use of equity securities

d. generates income that declines over time

12. Tax-free income can be earned by investing in

a. corporate bonds

b. municipal bonds

c. treasury bonds

d. common stock

13. All investors seek to

a. maximize their expected return

b. minimize their risk exposure

c. maximize their expected utility

d. minimize the number of their capital losses

14. Some people do not like mutual funds because they

a. have no tax advantages

b. are not exciting

c. offer less potential return than that available in securities

d. are too risky

15. Establishing a secondary objective helps the portfolio manager

a. learn more about the client's tax situation

b. learn more about the client's expected utility of investment

c. determine the appropriate level of risk for the customer

d. determine the necessary level of equity investment

16. Which of the following primary/secondary objective combinations is infeasible?

a. Stability of principal, income

b. Income, stability of principal

c. Growth of income, stability of principal

d. Capital appreciation, growth of income A B C B D C

Test bank for Portfolio Management

A 17. Which of the following primary/secondary objective combinations is infeasible?

a. Stability of principal, growth of income

b. Income, growth of income

c. Growth of income, capital appreciation

d. Income, capital appreciation

18. Which of the following primary/secondary objective combinations is infrequent?

a. Stability of principal, growth of income

b. Income, capital appreciation

c. Growth of income, capital appreciation

d. Growth of income, stability of principal

19. A disadvantage of portfolio splitting is that it

a. enables overseers to avoid making tough decisions

b. reduces current income

c. reduces the potential for capital appreciation

d. sacrifices liquidity

20. A common third category of investment (in addition to bonds and stock) is

a. cash equivalents

b. municipal securities

c. American depository receipts

d. repurchase agreements

21. Another name for portfolio dedication is

a. liability funding

b. technical analysis

c. fundamental analysis

d. strategic investment

22. Cash matching involves assembling a portfolio such that it

a. has the duration desired

b. has a cash flow stream that matches the requirements of a liability

stream

c. optimizes the risk/return combination

d. is informationally efficient

23. Principal concerns in duration matching are the

a. present value of the outflows and their duration

b. future value of the outflows and their duration

c. annuity value of the outflows

d. certainty equivalent of the outflows and the present value of its duration B A A A B A

Test bank for Portfolio Management

D 24. To reduce the duration of a bond portfolio, managers often use

a. shares of common stock

b. hard asset investments

c. preferred stock shares

d. treasury bills

25. The first mutual fund was founded in

a. 1776

b. 1815

c. 1924

d. 1957

26. The approximate number of mutual funds in the United States is

a. 100

b. 1,000

c. 10,000

d. 30,000

27. Which of the following trades on a stock exchange?

a. A closed-end fund

b. An open-end fund

c. Any mutual fund

d. Any investment company

28. For an open-end mutual fund

a. net asset value < market value

b. net asset value > market value

c. net asset value = market value

d. net asset value is greater than or equal to market value

29. If you buy shares in a load fund, you will pay

a. net asset value

b. less than net asset value

c. more than net asset value

d. cannot be determined

30. Before buying mutual fund shares, prospective investors must receive a

a. prospectus

b. indenture

c. debenture

d. hypothecation agreement C C A C C A

Test bank for Portfolio Management

D

A

D

C

a. stability of principal b. capital appreciation c. income d. growth of income 32. A client’s need for liquidity might best be addressed by a. investing in growth industry stocks b. investing in real estate c. increasing the proportion of bonds in the portfolio d. investing a portion of the portfolio in assets with checkwriting privileges 33. Money market mutual funds are sometimes added in a portfolio to a. reduce the duration b. increase the duration c. move from an income objective to a growth in income objective d. decrease the short-term tax consequences 34. An objective to lower the short-term taxes for a client might be addressed by including a. stocks in the utilities industry b. short-term U.S. Treasury securities c. long-term U.S. Treasury securities d. municipal bonds 35. A no-load mutual fund means there are no a. management fees

b. 12 b-1 fees

c. selling fees

d. stocks that pay dividends in this mutual fund

36. A redemption fee is a cost to the

a. manager of a mutual fund to pay for poor investment decisions

b. manager of a mutual fund when he resigns

c. investor of a mutual fund on the sale of shares

d. investor of a mutual fund when performance is poor

37. A mutual fund prospectus provides

a. a forecast of future fund performance

b. a forecast of the macroeconomy over the next year

c. a forecast of the expected tax consequences over the next year

d. provides the fund’s purpose and intended investment activity B D

Test bank for Portfolio Management

D

a. stock funds b. taxable bond funds c. municipal bond funds d. money market funds 39. Which of the following deal with decisions that have been made about long-term decisions? a. Investment constraints b. Fiduciary interest c. Investment strategy d. Investment policy

Chapter Four

Investment Policy

1. Retirement plans in the United States are subject to

a. FDRC

b. FERC

c. ERISA

d. ESSES

2. All of the following are purposes of an investment policy statement EXCEPT

a. identify portfolio manager

b. identify target return

c. identify investment constraints

d. provide a mechanism for evaluation

3. Clients are responsible for all of the following EXCEPT

a. defining long-range objectives

b. asset allocation

c. ensuring managers follow the investment policy

d. establishing investment policy

4. The investment manager is responsible for all of the following EXCEPT

a. educating the client regarding infeasible objectives

b. monitoring the portfolio

c. revising the portfolio as necessary

d. establishing investment policy C A B D

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