65 - Unit 20

small-cap is those with a market cap in

$300 million to $2 billion

Which of the following is associated with passive investment management approaches?

Belief in efficient markets Use of index investing Belief in the random walk theory

Two contrasting styles of portfolio management are growth and value. Which of the following pairs best describes the contrast?

Earnings momentum/book value

Which of the following statements are generally TRUE of the buy-and-hold strategy?

Equities would grow relative to fixed income Lower taxes and transactional costs Easy to manage

EMH - Weak - Will Work

Fundamental Analysis and Insider information

An individual who is a proponent of the efficient market hypothesis (EMH) will likely invest in which of the following?

Index funds

The capital asset pricing model (CAPM) forumla

Risk Free Rate + (Market Return - Risk Free Rate) x Beta

EMH - Weak - Wont Work

Technical Analysis

Probable return is

an estimate of all of the possible returns an investment is expected to yield

Short stock is

bearish

buying a call is

bearish

buying a put is

bearish

A long stock position is

bullish

Emanuel owns 500 shares of IJKL common stock with a cost basis of $63 per share. IJKL is now priced at $82 and Emanuel is concerned that the stock may suffer a sharp decline in the near term. As his IAR, you would suggest his best move to protect his profit would be to

buy 5 IJKL 80 put options.

Among investing strategies, it is hard to find one more passive than

buy and hold

large-cap is those with a market cap in

excess of $10 billion

MPT preaches that investors will always seek

highest return commensurate with the lowest risk.

In a Monete Carlo simulation, Small changes in the projected rate of return will make

large differences in the outcome.

A successful dollar cost averaging strategy requires

volatile market conditions a fixed dollar amount invested monthly

Hedge a Short Stock By

Purchasing a call

EMH - Semi Strong - Wont Work

Technical Analysis and Fundamental Analysis

A stock's market capitalization is

determined by multiplying the price per share times the number of outstanding common shares.

Hedge a Long Stock By

Purchasing a put

EMH - Strong - Will Work

Random Walk

An investor is short stock at 60. The current market price of the stock is 35, and he anticipates it will continue to decline. If he thinks the price will rise temporarily and if he does not wish to close out his short position, his best strategy to prevent a loss would be to

buy an XYZ 35 call

One of the most significant risks taken by bond investors is interest rate risk. All of these steps could be used to mitigate the effects of this risk EXCEPT

buying bonds of highest quality

Arthur M. Munger recently joined Piedmont Partners LLP as an analyst and is curious about modern portfolio theory (MPT). He approaches his senior, Sarah, to describe MPT. Sarah tells Arthur that MPT suggests that

by combining securities into a diversified portfolio, the overall portfolio risk will be less than the weighted average risk of the individual stocks.

An increase in the earnings per share growth rate from one reporting period to the next is called

earnings momentum.

Which of the following is a characteristic of the active management approach to investing?

Attempt to predict market changes Higher expenses as compared to passive approaches Focus on beating the market

Which of the following is NOT associated with passive investment management approaches?

Goal of beating the market

Which of the following statements is correct in relation to the efficient frontier?

It represents the maximum return for a given level of risk.

Long Stock

Lose money when stock goes down

EMH - Strong - Wont Work

Technical Analysis and Fundamental Analysis and Insider information

An investment adviser representative may describe dollar cost averaging to a customer as

a funding technique that will cause the average cost per share to be less than the average price per share

Dollar cost averaging is beneficial to the client because

it achieves an average cost per share, which is less than the average price per share.

What investment style is employed by a portfolio manager whose list of eligible securities includes only those with a market capitalization in excess of $20 billion?

Large-cap

Short Stock

Lose money when stock goes up

Automatic reinvestment is always at

NAV.

Best way to reduce volatility of your clients portfolio is a correlation coefficient that is

Negative or lowest

definition of the strong form EMH

"Stock prices fully reflect all information from public and private sources,"

mid-cap is those with a market cap in

$2 billion to $10 billion range

micro-cap is those with a market cap in

$50 million to $300 million

Beta is a measure of

relative systematic risk for stock or portfolio returns

Hedging is best accomplished by

taking a long position with a market view opposite that of the position held.

Which of the following forms of the efficient market hypothesis claims that technical analysis works?

technical analysis

weak form claims

that fundamental analysis works

semi-strong form claims

that inside information works

The standard benchmark used to measure the "risk-free" rate of return is

the 91-day Treasury bill.

There are several popular investment styles and, in many cases, portfolio managers use a blended approach to security selection. If a portfolio manager adhered to a pure value style, he would put most of his focus on

the company's financial statements

The optimal portfolio for an investor will always lie on

the efficient frontier

The goal of modern portfolio theory (MPT) is to construct the most efficient portfolio. An efficient portfolio is one that offers

the least risk for a given amount of return

The purpose of the efficient frontier is to plot the most efficient portfolios. An efficient portfolio is one that offers:

the most return for a given amount of risk or the least risk for a given amount of return.

If the customer elects to receive distributions in cash while other investors purchase shares through reinvestment

the proportional interest in the fund will decline.

An efficient market is one in which

very individual can quickly obtain and use information about new events in the marketplace.

The risk/return pyramid places commodities at the

very top, the point of the pyramid.

A new client's principal objective is income with a moderate degree of capital preservation. When reviewing his existing portfolio, you notice that the client's bond holdings are evenly split between those maturing in the next 1 to 2 years and those maturing in the next 10 to 11 years. This indicates that the client has been using which of the following strategies?

Barbell

Best way to increase volatility of your clients portfolio is a correlation coefficient that is

Highest

EMH - Semi Strong - Will Work

Insider information

Which of the following does refer to a style of investing

Passive Value Growth

Two portfolios have the same expected return of 10%. Portfolio A has a standard deviation of 5% and Portfolio B has a standard deviation of 18%. Under modern portfolio theory (MPT),

Portfolio A would be preferred by investors because the portfolio has the same return as Portfolio B but bears less risk

An investor wants to moderate overall portfolio risk and return profile with assets that have a low correlation to traditional asset classes. Which of the following is an appropriate asset class for the investor?

Private equity