investment mgmt exam 3
A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 29%, while stock B has a standard deviation of return of 20%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is 0.051, the correlation coefficient between the returns on A and B is _________. A) 0.515 B) 0.309 C) 0.206 D) 0.103
A
All other things equal (YTM = 10%), which of the following has the longest duration? Multiple Choice A) 30-year bond with a 10% coupon B) 20-year bond with a 9% coupon C) 20-year bond with a 7% coupon D) 10-year zero-coupon bond
A
Because of convexity, when interest rates change, the actual bond price will ____________ the bond price predicted by duration. A) always be higher thaN B) sometimes be higher than C) always be lower than D) sometimes be lower than
A
Bond portfolio immunization techniques balance ________ and ________ risk. A) price; reinvestment B) price; liquidity C) credit; reinvestment D) credit; liquidity
A
Bond prices are _______ sensitive to changes in yield when the bond is selling at a _______ initial yield to maturity. A) more; lower B) more; higher C) less; lower D) equally; higher or lower
A
If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________. A) stock's standard deviation B) variance of the market C) stock's beta D) covariance with the market index
A
In his famous critique of the CAPM, Roll argued that the CAPM ______________. A) is not testable because the true market portfolio can never be observed B) is of limited use because systematic risk can never be entirely eliminated C) should be replaced by the APT D) should be replaced by the Fama-French three-factor model
A
In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the _________. A) capital allocation line B) indifference curve C) investor's utility line D) security market line
A
Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of 0.6. Which of the following statements is most accurate? A) The equilibrium expected rate of return is higher for Kaskin than for Quinn. B) The stock of Kaskin has more total risk than Quinn. C) The stock of Quinn has more systematic risk than that of Kaskin.
A
Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B. A) 20% more B) slightly more C) 20% less D) slightly less
A
The efficient frontier represents a set of portfolios that A) maximize expected return for a given level of risk. B) minimize expected return for a given level of risk. C) maximize risk for a given level of return. D) None of the options.
A
The reward-to-volatility ratio is given by _________. A) the slope of the capital allocation line B) the second derivative of the capital allocation line C) the point at which the second derivative of the investor's indifference curve reaches zero D) the portfolio's excess return
A
Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which adviser was the better stock picker? A) Advisor A was better because he generated a larger alpha. B) Advisor B was better because she generated a larger alpha. C) Advisor A was better because he generated a higher return. D) Advisor B was better because she achieved a good return with a lower beta.
A
You have a $60,000 portfolio consisting of Intel, GE, and Con Edison. You put $24,000 in Intel, $16,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta? A) 1.053 B) 0.991 C) 0.810 D) 1.369
A
A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project? A) 0% B) 25% C) 50% D) 75%
B
A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta? A) 1 B) .75 C) .60 D) .55
B
A stock has a correlation with the market of 0.65. The standard deviation of the market is 25%, and the standard deviation of the stock is 33%. What is the stock's beta? A) 1.17 B) 0.86 C) 0.49 D) 0.14
B
According to the capital asset pricing model, a fairly priced security will plot _________. A) above the security market line B) along the security market line C) below the security market line D) at no relation to the security market line
B
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is _________. A) 0% B) 5% C) 7% D) 20%
B
Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________. A) increase the systematic risk of the portfolio B) increase the unsystematic risk of the portfolio C) increase the return of the portfolio D) decrease the variation in returns the investor faces in any one year
B
Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock's return? A) 15.9% B) 12.9% C) 13.2% D) 12%
B
Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________. A) fairly priced B) overpriced C) underpriced D) none of these answers
B
Stocks with a beta of zero offer an expected rate of return of zero. A) True B) False
B
The CAPM implies that investors require a higher return to hold highly volatile securities. A) True B) False
B
The duration of a 5-year zero-coupon bond is ____ years. A) 4.5 B) 5 C) 5.5 D) 3.5
B
You can construct a portfolio with beta of .75 by investing .75 of the investment budget in T-bills and the remainder in the market portfolio. A) True B) False
B
portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________. A) firm-specific risk B) systematic risk C) unique risk D) none of the options
B
A pension fund must pay out $1 million next year, $2 million the following year, and then $3 million the year after that. If the discount rate is 8%, what is the duration of this set of payments? A) 2 years B) 2.15 years C) 2.29 years D) 2.53 years
C
A portfolio with a 20% standard deviation generated a return of 14% last year when T-bills were paying 3.0%. This portfolio had a Sharpe ratio of ____. A) 0.75 B) 0.20 C) 0.55 D) 0.41
C
According to the capital asset pricing model, a security with a _________. A) negative alpha is considered a good buy B) positive alpha is considered overpriced C) positive alpha is considered underpriced D) zero alpha is considered a good buy
C
Banks and other financial institutions can best manage interest rate risk by _____________. A) maximizing the duration of assets and minimizing the duration of liabilities B) minimizing the duration of assets and maximizing the duration of liabilities C) matching the durations of their assets and liabilities D) matching the maturities of their assets and liabilities
C
Beta is a measure of security responsiveness to _________. A) firm-specific risk B) diversifiable risk C) market risk D) unique risk
C
Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always _________. A) equal to the sum of the securities' standard deviations B) equal to -1 C) equal to 0 D) greater than 0
C
Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate? A) 2% B) 6% C) 8% D) 12%
C
Semitool Corp. has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out that the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information, what was Semitool's actual excess return? A) 7% B) 8.5% C) 8.8% D) 9.25%
C
The _________ reward-to-variability ratio is found on the ________ capital market line. A) lowest; steepest B) highest; flattest C) highest; steepest D) lowest; flattest
C
The complete portfolio refers to the investment in _________. A) the risk-free asset B) the risky portfolio C) the risk-free asset and the risky portfolio combined D) the risky portfolio and the index
C
The standard deviation of return on investment A is 22%, while the standard deviation of return on investment B is 17%. If the covariance of returns on A and B is 0.007, the correlation coefficient between the returns on A and B is _________. A) 0.007 B) −0.187 C) 0.187 D) −0.007
C
What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500? A) -1 B) 0 C) 1 D) 0.5
C
Which of the following statements is false? A) Bond prices and yields are inversely related. B) An increase in a bond's YTM results in a smaller price change than a decrease in yield of equal magnitude. C) Prices of short-term bonds tend to be more sensitive to interest rate changes than prices of long-term bonds. D) Interest rate risk is inversely related to the bond's coupon rate.
C
Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? I. Book-to-market ratio II. Unexpected change in industrial production III. Firm size A) I only B) I and II only C) I and III only D) I, II, and III
C
You are considering investing $2,200 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 4% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 17%, and Y has an expected rate of return of 14%. To form a complete portfolio with an expected rate of return of 7%, you should invest approximately __________ in the risky portfolio. This will mean you will also invest approximately __________ and __________ of your complete portfolio in security X and Y, respectively. A) 0%; 60%; 40% B) 50%; 30%; 20% C) 25%; 15%; 10% D) 31%; 43%; 26%
C
You invest $1,800 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 12% and a standard deviation of 15% and a Treasury bill with a rate of return of 4%. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 9%. A) 11% B) 26% C) 60% D) 8%
C
According to the CAPM, what is the market risk premium given an expected return on a security of 16.0%, a stock beta of 1.6, and a risk-free interest rate of 8%? A) 12.80% B) 8.80% C) 8.00% D) 5.00%
D
According to the capital asset pricing model, fairly priced securities have _________. A) negative betas B) positive alphas C) positive betas D) zero alphas
D
Empirical results estimated from historical data indicate that betas _________. A) are always close to zero B) are constant over time C) of all securities are always between zero and 1 D) seem to regress toward 1 over time
D
Risk that can be eliminated through diversification is called ______ risk. A) unique B) firm-specific C) diversifiable D) all of these options
D
The CAPM _______. A) predicts the relationship between risk and expected return of an asset B) provides a benchmark rate of return for evaluating possible investments C) helps us make an educated guess as to expected return on assets that have not yet traded in the marketplace D) All of the options.
D
To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________. A) -0.5 B) 0.0 C) 0.5 D) -1.0
D
Which of the following correlation coefficients will produce the least diversification benefit? A) -.6 B) -.3 C) 0 D) .8
D
You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: I. Expected return II. Standard deviation III. Correlation with your portfolio A) I only B) I and II only C) I and III only D) I, II, and III
D
You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: I. Expected return II. Standard deviation III. Correlation with your portfolio A) I only B) I and II only C) I and III only D) I, II, and III
D
You put up $80 at the beginning of the year for an investment. The value of the investment grows 2% and you earn a dividend of $8.00. Your HPR was ____. A) 2.0% B) 8.0% C) 10.0% D) 12.0%
D
he values of beta coefficients of securities are __________. A) always positive B) always negative C) always between positive 1 and negative 1 D) usually positive but are not restricted in any particular way
D