Portfolio Analysis

Which of the following stocks would be considered cyclical? A Automobile manufacturer B Pharmaceutical manufacturer C Gold mining company D Computer software developer

A Automobile manufacturer

Which statement is TRUE regarding a portfolio that has a "Beta" of +1? A Changes in the value of the portfolio should be both in the same direction and velocity as price movements in the market B Changes in the value of the portfolio should be at the same velocity, but opposite direction to price movements in the market C Changes in the value of the portfolio should be in the same direction, but greater velocity than market price movements D Changes in the value of the portfolio should be in the same direction, but lower velocity than market price movements Review

A Changes in the value of the portfolio should be both in the same direction and velocity as price movements in the market

All of the following investments would be considered to be "defensive" during deflationary periods EXCEPT: A Common Stock B Preferred Stock C 10-Year Bonds D 30-Year Bonds

A Common Stock In a deflationary period, interest rates will fall, raising the prices of fixed income securities. Thus, fixed income securities are defensive securities in times of deflation. Equity securities' price movements will depend on the state of the economy at the time deflation occurs, and thus would not be defensive. Review

The Capital Asset Pricing Model (CAPM) would be used by a proponent of: A Efficient market theory B Keynesian theory C Monetarist theory D Market equilibrium theory

A Efficient market theory

Which of the following best describes a stock that pays out most of its earnings as dividends? A Income stock B Special situations stock C Defensive stock D Blue Chip stock

A Income stock In contrast, an income stock is one that pays a high dividend rate. These are often slow-growth companies that make up for their lack of growth in stock price by paying a higher dividend rate. Utilities are a "classic" income stock.

Common shares of which of the following issuers are likely to have a Beta coefficient much higher than +1? A Semi-conductor manufacturer B Pharmaceutical manufacturer C Public utility D Food processor Review

A Semi-conductor manufacturer High technology companies typically have very high betas relative to the market - these are growth companies.

Beta is a measure of: A market risk B marketability risk C credit risk D reinvestment risk

A market risk The "Beta" coefficient is a measure of price volatility of a stock (or a portfolio) relative to the market - thus it is a measure of market risk. A Beta of +1 indicates that a particular security moves as fast, and in the same direction, as the market. A Beta of +1/2 indicates that the stock's price moves half as fast, and in the same direction, as the overall market. Review

The risk inherent in a portfolio that cannot be diversified away is known as: A systematic risk B non-systematic risk C credit risk D marketability risk

A systematic risk Market risk is the same as systematic risk. It is the risk of the market moving adversely, and one's securities positions moving with the market. This risk cannot be diversified away; but it can be hedged against.

If high yield bonds are yielding 15%, corporate bonds are yielding 10%, and 1-Year Treasury issues are yielding 5%, the risk premium for investing in high yield bonds is: A 15% B 10% C 5% D 0%

B 10% The risk premium is the excess return achieved for investing in a specific class of assets as compared to the risk free return. The high yield bonds are yielding 15% when the risk-free return is 5%, therefore the excess return for investing in high yield bonds is 10%. Review

An investor has a broadly diversified portfolio of blue chip stocks. To hedge the portfolio against market risk, which of the following strategies would you recommend? A Buy index calls B Buy index puts C Sell index calls D Sell index puts

B Buy index puts Index options can be used to hedge a portfolio. If index puts are bought, then a drop in the market lowering the portfolio's value will be offset by a gain in the value of the index puts. This strategy hedges against market risk, also known as systematic risk. Non-systematic risk is the risk that any one security will perform poorly. The larger the portfolio, the lower the effect of non-systematic risk.

Common shares of which of the following issuers are likely to have a Beta coefficient much lower than +1? A Airline B Public utility C Software developer D Electronics manufacturer

B Public utility A Beta of less than 1, say 1/2, indicates that the stock's prices moves half as fast as the overall market. Thus, a stock with a low beta is one that is strongly defensive - that is one that is not affected by business cycles. Electric and gas utilities, and railroads have the lowest beta factors - around .5. These companies' betas are the lowest because their rates of return are regulated.

Growth companies are characterized by: A low dividend payout ratios and low price / earnings ratios B low dividend payout ratios and high price / earnings ratios C high dividend payout ratios and low price / earnings ratios D high dividend payout ratios and high price / earnings ratios

B low dividend payout ratios and high price / earnings ratios

The risk inherent in a portfolio that can be diversified away is known as: A systematic risk B non-systematic risk C credit risk D marketability risk

B non-systematic risk Market risk is the same as systematic risk. It is the risk of the market moving adversely, and one's securities positions moving with the market. This risk cannot be diversified away; but it can be hedged against. Non-systematic risk is the portion of risk in a portfolio that is "stock specific." Also known as selection risk, this can be diversified away by adding more and more stocks to the portfolio, until the portfolio becomes reflective of the "market" as a whole. Review

A sharp rise in interest rates would have the greatest effect on the market price of: A pharmaceutical stocks B public utility stocks C electronics stocks D forest products stocks

B public utility stocks However, as interest rates rise, utility stocks are hit hard precisely because of their high leverage. Each time the utility goes out to refinance its debt as interest rates rise, it will be more expensive, reducing earnings, and hence the stock price. Other types of companies do not have as stable an income stream and are not as highly leveraged. Review

If 1-Year Treasuries are yielding 5%, all preferred stocks are yielding 10%, and a manager selects a portfolio of preferred stocks yielding 15%, the risk premium for investing in the manager's preferred stock selections is: A 0% B 5% C 10% D 15%

C 10% The risk premium is the excess return achieved for investing in a specific class of assets as compared to the risk free return. The manager's preferred stock selections are yielding 15% at the same as risk-free Treasuries are yielding 5%. The excess return for investing in this manager's preferred stock selections is 10%.

If 26-week T-bills are yielding 5%, all common stocks are yielding 10%, and growth stocks are yielding 15%, the risk premium for investing in growth stocks is: A 0% B 5% C 10% D 15%

C 10% The risk premium is the excess return achieved for investing in a specific class of assets as compared to the risk free return. The risk-free return is 5%, while growth stocks are yielding 15%. The excess return for investing in growth stocks is 10%.

"CAPM" is an abbreviation for: A Corporate Allocation Portfolio Mechanism B Computer Algorithm Pricing Module C Capital Asset Pricing Model D Computer Assisted Portfolio Management Review

C Capital Asset Pricing Model

Which of the following stocks would be considered counter-cyclical? A Automobile manufacturer B Pharmaceutical manufacturer C Gold mining company D Computer software developer

C Gold mining company The performance of counter-cyclical stocks moves opposite to the economic cycle. Gold mining stocks are counter-cyclical. In bad economic times, people "flee to safety," selling stocks that are adversely affected in bad times and buying gold stocks - since gold tends to hold its value in good times or bad.

All of the following are defensive stocks EXCEPT: A Beer Manufacturer B Supermarket Chain C Home Builder D Public Utility

C Home Builder Defensive stocks are not much affected by economic downturns. During economic downturns, people still buy beer, food, and electricity. These are all defensive stocks. Home building is highly cyclical and is severely affected by economic downturns. Review

Common shares of which of the following issuers are likely to have a Beta coefficient much lower than +1? A Tool and die maker B Pharmaceutical manufacturer C Public utility D Electronics manufacturer

C Public utility

The Capital Asset Pricing Model (CAPM) would identify the most efficient investments as those with the: A lowest return for the lowest level of risk assumed B lowest return for the highest level of risk assumed C highest return for the lowest level of risk assumed D highest return for the highest level of risk assumed

C highest return for the lowest level of risk assumed CAPM is a methodology for finding the most efficient investments - those that give the greatest return for the amount of risk assumed. The model identifies the most efficient investments as those that give a rate of return equal to the "risk-free" rate of return (the rate of return for investments only having systematic risk) plus a premium for any non-systematic risk inherent in the investment. Review

Pension funds seeking safety of principal and maximum income would use all of the following investment strategies EXCEPT: A purchase Government securities B purchase Agency securities C sell short Government and Agency securities D sell covered Treasury Bond calls

C sell short Government and Agency securities

A company's common stock has a Beta of -1.5. The market has declined over the last 3 years. During this period, the price of the stock would have: A declined at the same rate as the market B increased at the same rate as the market C declined at a faster rate than the market D increased at a faster rate than the market

D increased at a faster rate than the market Negative beta stocks move opposite to the general market - e.g., they are counter-cyclical stocks. If a stock has a negative "beta," the stock's price moves in the opposite direction to the market. If the beta is -1.5, the stock moves in the opposite direction of the market as a whole, at a rate that is 1.5 times as fast as the general market move.

are characterized by high P-E ratios and very low dividend payout ratios

Growth Companies

Which of the following securities are directly interest rate sensitive? I Utility Stocks II Growth Stocks III Preferred Stocks IV Common Stocks

I and III I Utility Stocks III Preferred Stocks Utility stocks are directly interest rate sensitive since utilities have an extremely large portion of their capitalization as debt. If interest rates rise, as the utilities refund maturing debt, their interest costs increase, depressing earnings and therefore the stock price. Preferred stocks are directly interest rate sensitive because they pay a fixed dividend rate. If interest rates rise, their prices must fall to provide comparable market yields; and vice-versa.

Pension funds seeking safety of principal and maximum income would use which investment strategies? I Purchase Government and Agency securities II Sell short Government and Agency securities III Sell covered Treasury Bond calls IV Sell naked Treasury Bond calls

I and III Pension funds must be prudently managed. The purchase of government and agency securities is appropriate, as is the sale of covered calls against the securities in the portfolio to generate extra income. Short sales are not suitable because of unlimited loss potential, as is the sale of naked calls.

The alpha coefficient is a measure of: I stock specific risk II market risk III a stock's price movement relative to the market as a whole IV a stock's price movement independent of the market as a whole

I and IV

Rank the following investments from lowest to highest, for overall historical returns experienced by investors over long periods of time: I Treasury Bills II AAA Rated Corporate Bonds III Common Stocks

I, II, III

Which of the following statements are TRUE about a stock's Beta coefficient? I A Beta of +1 indicates that the stock moves as fast as, but in the exact opposite direction of, the market II A Beta of +1 indicates that the stock moves as fast as, and in the same direction as, the market III A stock with a low beta is a defensive stock IV A stock with a low beta is a speculative stock

II and III

Which statements are TRUE regarding a portfolio that has a "Beta" of -1? I The portfolio moves in the same direction of the market as a whole II The portfolio moves in the opposite direction of the market as a whole III The portfolio moves at the same velocity as the market as a whole IV The portfolio moves at a slower velocity than the market as a whole

II and III Negative beta stocks move opposite to the general market - e.g., they are counter-cyclical stocks. A portfolio with a "beta" coefficient of -1 is one that moves at the same velocity as the market as a whole, but it moves in the opposite direction to the market. There are very few "negative" beta stocks - gold stocks being one of them. When the stock market "tanks," investors flee to safety - gold - so these stocks rise when the market falls, and vice-versa. Review

trade at lower P-E ratios and pay out a reasonable proportion of the earnings as dividends.

Mature Companies