CFA Portfolio Management

If the standard deviation of stock A is 10.6%, the standard deviation of stock B is 14.6%, and the covariance between the two is 0.015476, what is the correlation coefficient? A)0. B)0.0002. C)+1.

+1

Adding a stock to a portfolio will reduce the risk of the portfolio if the correlation coefficient is less than which of the following? A)+0.50. B)+1.00. C)0.00.

+1.00

If the standard deviation of stock X is 7.2%, the standard deviation of stock Y is 5.4%, and the covariance between the two is -0.0031, their correlation coefficient is closest to: A)-0.80. B)-0.64. C)-0.19.

-0.80

The beta of stock D is -0.5. If the expected return of Stock D is 8%, and the risk-free rate of return is 5%, what is the expected return of the market? A)+3.0%. B)+3.5%. C)-1.0%.

-1.0%

Stock 1 has a standard deviation of 10. Stock 2 also has a standard deviation of 10. If the correlation coefficient between these stocks is -1, what is the covariance between these two stocks? A)0.00. B)-100.00. C)1.00.

-100.00

An analyst gathered the following data for Stock A and Stock B: Time PeriodStock A ReturnsStock B Returns110%15%26%9%38%12% What is the covariance for this portfolio? A)12. B)3. C)6.

6

A stock has a beta of 1.55 and an expected return of 17.3%. If the risk-free rate is 8%, the expected market risk premium is: A)12.0%. B)14.0%. C)6.0%.

6.0%

A portfolio's excess return per unit of systematic risk is known as its: A)Jensen's alpha. B)Sharpe ratio. C)Treynor measure.

Treynor measure

Which of the following is the risk that disappears in the portfolio construction process? A)Unsystematic risk. B)Systematic risk. C)Interest rate risk.

Unsystematic risk

While assessing an investor's risk tolerance, a financial adviser is least likely to ask which of the following questions? A)"How much insurance coverage do you have?" B)"Is your home life stable?" C)"What rate of investment return do you expect?"

"What rate of investment return do you expect?"

What is the variance of a two-stock portfolio if 15% is invested in stock A (variance of 0.0071) and 85% in stock B (variance of 0.0008) and the correlation coefficient between the stocks is -0.04? A)0.0007. B)0.0020. C)0.0026.

0.0007

If the standard deviation of asset A is 12.2%, the standard deviation of asset B is 8.9%, and the correlation coefficient is 0.20, what is the covariance between A and B? A)0.0001. B)0.0022. C)0.0031.

0.0022

An investor's portfolio currently has an expected return of 11% with a variance of 0.0081. She is considering replacing 20% of the portfolio with a security that has an expected return of 12% and a standard deviation of 0.07. If the covariance between the returns on the existing portfolio and the returns on the added security is 0.0058, the variance of returns on the new portfolio will be closest to: A)0.00545. B)0.00724. C)0.00984.

0.00724

If a stock's beta is equal to 1.2, its standard deviation of returns is 28%, and the standard deviation of the returns on the market portfolio is 14%, the covariance of the stock's returns with the returns on the market portfolio is closest to: A)0.600. B)0.168. C)0.024.

0.024

The correlation coefficient between stocks A and B is 0.75. The standard deviation of stock A's returns is 16% and the standard deviation of stock B's returns is 22%. What is the covariance between stock A and B? A)0.3750. B)0.0264. C)0.0352.

0.0264

If the standard deviation of returns for stock X is 0.60 and for stock Y is 0.40 and the covariance between the returns of the two stocks is 0.009, the correlation between stocks X and Y is closest to: A)26.6670. B)0.0375. C)0.0020.

0.0375

If the standard deviation of returns for stock A is 0.40 and for stock B is 0.30 and the covariance between the returns of the two stocks is 0.007 what is the correlation between stocks A and B? A)0.05830. B)17.14300. C)0.00084.

0.05830

An investor buys one share of stock for $100. At the end of year one she buys three more shares at $89 per share. At the end of year two she sells all four shares for $98 each. The stock paid a dividend of $1.00 per share at the end of year one and year two. What is the investor's time-weighted rate of return? A)0.06%. B)11.24%. C)6.35%.

0.06%

An investor calculates the following statistics on her two-stock (A and B) portfolio. σA = 20% σB = 15% rA,B = 0.32 WA = 70% WB = 30% The portfolio's standard deviation is closest to: A)0.1600. B)0.0256. C)0.1832.

0.1600

An analyst gathers the following data about the returns for two stocks. Stock AStock BE(R)0.040.09σ20.00250.0064CovA,B= 0.001 The correlation between the returns of Stock A and Stock B is closest to: A)0.25. B)0.50. C)0.63.

0.25

An investor has a two-stock portfolio (Stocks A and B) with the following characteristics: σA = 55% σB = 85% CovarianceA,B = 0.09 WA = 70% WB = 30% The variance of the portfolio is closest to: A)0.25. B)0.39. C)0.54.

0.25

Two assets are perfectly positively correlated. If 30% of an investor's funds were put in the asset with a standard deviation of 0.3 and 70% were invested in an asset with a standard deviation of 0.4, what is the standard deviation of the portfolio? A)0.151. B)0.370. C)0.426.

0.370

The covariance of the market's returns with the stock's returns is 0.008. The standard deviation of the market's returns is 0.1 and the standard deviation of the stock's returns is 0.2. What is the correlation coefficient between the stock and market returns? A)0.00016. B)0.40. C)0.91.

0.40

Given the following data, what is the correlation coefficient between the two stocks and the Beta of stock A? standard deviation of returns of Stock A is 10.04% standard deviation of returns of Stock B is 2.05% standard deviation of the market is 3.01% covariance between the two stocks is 0.00109 covariance between the market and stock A is 0.002 Correlation CoefficientBeta (stock A) A)0.65562.20 B)0.52962.20 C)0.52960.06

0.5296 2.20

An analyst has estimated the following: Correlation of Bahr Industries returns with market returns = 0.8 Variance of the market returns = 0.0441 Variance of Bahr returns = 0.0225 The beta of Bahr Industries stock is closest to: A)0.57. B)0.77. C)0.67.

0.57

Assets A (with a variance of 0.25) and B (with a variance of 0.40) are perfectly positively correlated. If an investor creates a portfolio using only these two assets with 40% invested in A, the portfolio standard deviation is closest to: A)0.5795. B)0.3742. C)0.3400.

0.5795

An analyst has developed the following data for two companies, PNS Manufacturing (PNS) and InCharge Travel (InCharge). PNS has an expected return of 15% and a standard deviation of 18%. InCharge has an expected return of 11% and a standard deviation of 17%. PNS's correlation with the market is 75%, while InCharge's correlation with the market is 85%. If the market standard deviation is 22%, which of the following are the betas for PNS and InCharge? Beta of PNSBeta of InCharge A)0.61 0.66 B)0.66 0.61 C)0.92 1.10

0.61 0.66

A portfolio of options had a return of 22% with a standard deviation of 20%. If the risk-free rate is 7.5%, what is the Sharpe ratio for the portfolio? A)0.725. B)0.568. C)0.147.

0.725

If the standard deviation of the market's returns is 5.8%, the standard deviation of a stock's returns is 8.2%, and the covariance of the market's returns with the stock's returns is 0.003, what is the beta of the stock? A)0.05. B)0.89. C)1.07.

0.89

An investor begins with a $100,000 portfolio. At the end of the first period, it generates $5,000 of income, which he does not reinvest. At the end of the second period, he contributes $25,000 to the portfolio. At the end of the third period, the portfolio is valued at $123,000. The portfolio's money-weighted return per period is closest to: A)1.20%. B)-0.50%. C)0.94%.

0.94%

A 10% coupon bond was purchased for $1,000. One year later the bond was sold for $915 to yield 11%. The investor's holding period yield on this bond is closest to: A)18.5%. B)1.5%. C)9.0%.

1.5%

Which of the following would a technical analyst most likely interpret as a "buy" signal? A)30-day moving average crosses above a 5-day moving average. B)10-day moving average crosses above a 60-day moving average. C)20-day moving average crosses below a 100-day moving average.

10-day moving average crosses above a 60-day moving average

Given the following information, what is the required rate of return on Bin Co? inflation premium = 3% real risk-free rate = 2% Bin Co. beta = 1.3 market risk premium = 4% A)7.6%. B)16.7%. C)10.2%.

10.2%

On January 1, Jonathan Wood invests $50,000. At the end of March, his investment is worth $51,000. On April 1, Wood deposits $10,000 into his account, and by the end of June, his account is worth $60,000. Wood withdraws $30,000 on July 1 and makes no additional deposits or withdrawals the rest of the year. By the end of the year, his account is worth $33,000. The time-weighted return for the year is closest to: A)5.5%. B)10.4%. C)7.0%.

10.4%

For a security with a beta of 1.10 when the risk-free rate is 5%, and the expected market risk premium is 5%, what is the expected rate of return on the security according to the CAPM? A)5.5%. B)10.5%. C)15.5%.

10.5%

An investor buys a share of stock for $200.00 at time t = 0. At time t = 1, the investor buys an additional share for $225.00. At time t = 2 the investor sells both shares for $235.00. During both years, the stock paid a per share dividend of $5.00. What are the approximate time-weighted and money-weighted returns respectively? A)10.8%; 9.4%. B)7.7%; 7.7%. C)9.0%; 15.0%.

10.8%; 9.4%

Stock A has a standard deviation of 4.1% and Stock B has a standard deviation of 5.8%. If the stocks are perfectly positively correlated, which portfolio weights minimize the portfolio's standard deviation? Stock AStock B A)0%100% B)100%0% C)63%37%

100% 0%

Kendra Jackson, CFA, is given the following information on two stocks, Rockaway and Bridgeport. Covariance between the two stocks = 0.0325 Standard Deviation of Rockaway's returns = 0.25 Standard Deviation of Bridgeport's returns = 0.13 Assuming that Jackson must construct a portfolio using only these two stocks, which of the following combinations will result in the minimum variance portfolio? A)100% in Bridgeport. B)50% in Bridgeport, 50% in Rockaway. C)80% in Bridgeport, 20% in Rockaway.

100% in Bridgeport

Stock A has a standard deviation of 0.5 and Stock B has a standard deviation of 0.3. Stock A and Stock B are perfectly positively correlated. According to Markowitz portfolio theory how much should be invested in each stock to minimize the portfolio's standard deviation? A)100% in Stock B. B)30% in Stock A and 70% in Stock B. C)50% in Stock A and 50% in Stock B.

100% in stock B

If the risk-free rate of return is 3.5%, the expected market return is 9.5%, and the beta of a stock is 1.3, what is the required return on the stock according to the capital asset pricing model? A)11.3%. B)12.4%. C)7.8%.

11.3%

An investor sold a 30-year bond at a price of $850 after he purchased it at $800 a year ago. He received $50 of interest at the time of the sale. The annualized holding period return is: A)12.5%. B)6.25%. C)15.0%.

12.5%

Given a beta of 1.25 and a risk-free rate of 6%, what is the expected rate of return assuming a 12% market return? A)10%. B)13.5%. C)31%.

13.5%

The beta of Stock A is 1.3. If the expected return of the market is 12%, and the risk-free rate of return is 6%, what is the expected return of Stock A? A)14.2%. B)15.6%. C)13.8%.

13.8%

What is the expected rate of return on a stock that has a beta of 1.4 if the market risk premium is 9% and the risk-free rate is 4%? A)11.0%. B)16.6%. C)13.0%.

16.6%

The expected market premium is 8%, with the risk-free rate at 7%. What is the expected rate of return on a stock with a beta of 1.3? A)10.4%. B)16.3%. C)17.4%.

17.4%

A portfolio manager invests 40% of a portfolio in Asset X, which has an expected standard deviation of returns of 15%, and the remainder in Asset Y, which has an expected standard deviation of returns of 25%. If the covariance of returns between assets X and Y is 0.0158, the expected standard deviation of portfolio returns is closest to: A)18.4%. B)16.3%. C)2.7%.

18.4%

A bond was purchased exactly one year ago for $910 and was sold today for $1,020. During the year, the bond made two semi-annual coupon payments of $30. What is the holding period return? A)12.1%. B)18.7%. C)6.0%.

18.7%

The expected rate of return is 1.5 times the 16% expected rate of return from the market. What is the beta if the risk free rate is 8%? A)2. B)3. C)4.

2

What is the required rate of return for a stock with a beta of 1.2, when the risk-free rate is 6% and the market risk premium is 12%? A)13.2%. B)15.4%. C)20.4%.

20.4%

If an investor bought a stock for $32 and sold it nine months later for $37.50 after receiving $2 in dividends, what was the holding period return on this investment? A)32.42%. B)17.19%. C)23.44%.

23.44%

A stock is currently worth $75. If the stock was purchased one year ago for $60, and the stock paid a $1.50 dividend during the year, what is the holding period return? A)27.5%. B)24.0%. C)22.0%.

27.5%

The expected rate of return is twice the 12% expected rate of return from the market. What is the beta if the risk-free rate is 6%? A)2. B)3. C)4.

3

An investor expects a stock currently selling for $20 per share to increase to $25 by year-end. The dividend last year was $1 but he expects this year's dividend to be $1.25. What is the expected holding period return on this stock? A)24.00%. B)28.50%. C)31.25%.

31.25%

The expected rate of return is 2.5 times the 12% expected rate of return from the market. What is the beta if the risk-free rate is 6%? A)3. B)4. C)5.

4

An investor makes the following investments: She purchases a share of stock for $50.00. After one year, she purchases an additional share for $75.00. After one more year, she sells both shares for $100.00 each. There are no transaction costs or taxes. During year one, the stock paid a $5.00 per share dividend. In year 2, the stock paid a $7.50 per share dividend. The investor's required return is 35%. Her money-weighted return is closest to: A)16.1%. B)-7.5%. C)48.9%.

48.9%

Assume an investor makes the following investments: Today, she purchases a share of stock in Redwood Alternatives for $50.00. After one year, she purchases an additional share for $75.00. After one more year, she sells both shares for $100.00 each. There are no transaction costs or taxes. The investor's required return is 35.0%. During year one, the stock paid a $5.00 per share dividend. In year two, the stock paid a $7.50 per share dividend. The time-weighted return is: A)51.4%. B)23.2%. C)51.7%.

51.4%

Technical analysts who use cycles define a Kondratieff wave as a cycle of: A)10 years. B)18 years. C)54 years.

54 years

An investor buys one share of stock for $100. At the end of year one she buys three more shares at $89 per share. At the end of year two she sells all four shares for $98 each. The stock paid a dividend of $1.00 per share at the end of year one and year two. What is the investor's money-weighted rate of return? A)0.06%. B)5.29%. C)6.35%.

6.35%

The manager of the Fullen Balanced Fund is putting together a report that breaks out the percentage of the variation in portfolio return that is explained by the target asset allocation, security selection, and tactical variations from the target, respectively. Which of the following sets of numbers was the most likely conclusion for the report? A)90%, 6%, 4%. B)50%, 25%, 25%. C)33%, 33%, 33%.

90%, 6%, 4%

Which of the following technical analysis observations most likely represents a change in polarity? A)A resistance level on a line chart is breached and later acts as a support level. B)Bars on a candlestick chart change from empty to filled. C)Following an "X" column, a point-and-figure chart begins a new "O" column.

A resistance level on a line chart is breached and later acts as a support level

When the market is in equilibrium, all: A)assets plot on the CML. B)assets plot on the SML. C)investors hold the market portfolio.

assets plot on the SML

Using the following correlation matrix, which two stocks would combine to make the lowest-risk portfolio? (Assume the stocks have equal risk and returns.) StockABCA+ 1----B- 0.2+ 1--C+ 0.6- 0.1+ 1 A)C and B. B)A and C. C)A and B.

A and B

Which of the following statements is most accurate about integrating ESG considerations into portfolio planning and construction? A)Integrating ESG considerations into portfolio planning and construction is likely to decrease portfolio returns. B)Investors who engage in active ownership to pursue their ESG considerations should vote their shares themselves rather than delegating share voting to an investment manager. C)A broad market index is an inappropriate benchmark for a portfolio that uses negative screening to address the investor's ESG concerns.

A broad market index is an inappropriate benchmark for a portfolio that uses negative screening to address the investor's ESG concerns

Which of the following uses of data is most accurately described as curation? A)A data technician accesses an offsite archive to retrieve data that has been stored there. B)An investor creates a word cloud from financial analysts' recent research reports about a company. C)An analyst adjusts daily stock index data from two countries for their different market holidays.

An analyst adjusts daily stock index data from two countries for their different market holidays.

Which of the following portfolios falls below the Markowitz efficient frontier? PortfolioExpected ReturnExpected Standard DeviationA7%14%B9%26%C15%30%D12%22% A)B. B)C. C)D.

B

Which one of the following portfolios does not lie on the efficient frontier? PortfolioExpected ReturnStandard DeviationA75B912C1110D1515 A)B. B)C. C)A.

B

Of the six attainable portfolios listed, which portfolios are not on the efficient frontier? PortfolioExpected ReturnStandard Deviation A26%28% B23%34% C14%23% D18%14% E11%8% F18%16% A)A, B, and C. B)B, C, and F. C)C, D, and E.

B, C, and F

Brian Nebrik, CFA, meets with a new investment management client. They compose a statement that defines each of their responsibilities concerning this account and choose a benchmark index with which to evaluate the account's performance. Which of these items should be included in the client's Investment Policy Statement (IPS)? A)Only one of these items. B)Neither of these items. C)Both of these items.

Both of these items

A return objective is said to be relative if the objective is: A)compared to a specific numerical outcome. B)stated in terms of probability. C)based on a benchmark index or portfolio.

based on a benchmark index or portfolio

Which of the following actions is best described as taking place in the execution step of the portfolio management process? A)Rebalancing the portfolio. B)Choosing a target asset allocation. C)Developing an investment policy statement.

Choosing a target asset allocation

Which of the following statements about portfolio management is most accurate? A)As an investor diversifies away the unsystematic portion of risk, the correlation between his portfolio return and that of the market approaches negative one. B)Combining the capital market line (CML) (risk-free rate and efficient frontier) with an investor's indifference curve map separates out the decision to invest from the decision of what to invest in. C)The security market line (SML) measures systematic and unsystematic risk versus expected return; the CML measures total risk.

Combining the capital market line (CML) (risk-free rate and efficient frontier) with an investor's indifference curve map separates out the decision to invest from the decision of what to invest in

Which of the following is least likely considered a source of systematic risk for bonds? A)Default risk. B)Purchasing power risk. C)Market risk.

Default risk

Which of the following institutional investors is most likely to have low liquidity needs? A)Property insurance company. B)Bank. C)Defined benefit pension plan.

Defined benefit pension plan

Which of the following asset class specifications is most appropriate for asset allocation purposes? A)Consumer discretionary. B)Emerging markets. C)Domestic bonds.

Domestic bonds

A technical analyst examining the past 12 months of daily price data for evidence of cycles is most likely to identify: A)decennial patterns. B)Kondratieff waves. C)Elliott wave patterns.

Elliot wave patterns

Which of the following statements about the importance of risk and return in the investment objective is least accurate? A)The investor's risk tolerance is likely to determine what level of return will be feasible. B)The return objective may be stated in dollar amounts even if the risk objective is stated in percentages. C)Expressing investment goals in terms of risk is more appropriate than expressing goals in terms of return.

Expressing investment goals in terms of risk is more appropriate than expressing goals in terms of return

From a high of $180, a stock price decreases to a low of $100 and then begins increasing. A technical analyst states that she expects resistance levels to emerge at $140, $150, and $153.33. This analyst is most likely forecasting these resistance levels based on: A)an inverse head and shoulders pattern. B)Fibonacci numbers. C)moving average convergence/divergence lines.

Fibonacci numbers

Which of the following statements about fintech is most accurate? A)A primary driver of fintech is the increasingly structured nature of data that firms must process. B)Financial services that involve subjective judgment, such as investment advice, are unlikely to be affected by fintech. C)Fintech companies include those that develop technology for the financial services industry.

Fintech companies include those that develop technology for the financial services industry

An analyst collected the following data for three possible investments. Alpha Corporation has a beta of 1.6, Omega Company has a beta of 1.2, and Lambda, Inc. has a beta of 0.5. The expected return on the market is -3% and the risk-free rate is 4%. Assuming that capital markets are in equilibrium, which stock has the highest expected return? A)Lambda. B)Alpha. C)Omega.

Lambda

Becky Scott and Sid Fiona have the same expectations about the risk and return of the market portfolio; however, Scott selects a portfolio with 30% T-bills and 70% invested in the market portfolio, while Fiona holds a leveraged portfolio, having borrowed to invest 130% of his portfolio equity value in the market portfolio. Regarding their preferences between risk and return and their indifference curves, it is most likely that: A)Fiona's indifference curves are flatter than Scott's. B)Scott is willing to take on more risk to increase her expected portfolio return than Fiona is. C)Scott is risk averse but Fiona is not.

Fiona's indifference curves are flatter than Scott's

In the context of the capital market line (CML), which of the following statements is CORRECT? A)Firm-specific risk can be reduced through diversification. B)Market risk can be reduced through diversification. C)The two classes of risk are market risk and systematic ris

Firm-specific risk can be reduced through diversification

Investors who are less risk averse will have what type of indifference curves for risk and expected return? A)Steeper. B)Inverted. C)Flatter.

Flatter

Over a sample period, an investor gathers the following data about three mutual funds. Mutual FundPortfolio ReturnPortfolio Standard DeviationPortfolio BetaP13%18%1.2Q15%20%1.4R18%24%1.8 The risk-free rate is 5%. Based solely on the Sharpe measure, an investor would prefer: A)Fund R. B)Fund P. C)Fund Q.

Fund R

When preparing a strategic asset allocation, how should asset classes be defined with respect to the correlations of returns among the securities in each asset class? A)Low correlation within asset classes and high correlation between asset classes. B)Low correlation within asset classes and low correlation between asset classes. C)High correlation within asset classes and low correlation between asset classes.

High correlation within asset classes and low correlation between asset classes

Which of the following should least likely be included as a constraint in an investment policy statement (IPS)? A)Constraints put on investment activities by regulatory agencies. B)Any unique needs or preferences an investor may have. C)How funds are spent after being withdrawn from the portfolio.

How funds are spent after being withdrawn from the portfolio

Which one of the following statements about correlation is NOT correct? A)Potential benefits from diversification arise when correlation is less than +1. B)If the correlation coefficient were 0, a zero variance portfolio could be constructed. C)If the correlation coefficient were -1, a zero variance portfolio could be constructed.

If the correlation coefficient were 0, a zero variance portfolio could be constructed

Which of the following statements regarding the covariance of rates of return is least accurate? A)If the covariance is negative, the rates of return on two investments will always move in different directions relative to their means. B)Covariance is positive if two variables tend to both be above their mean values in the same time periods. C)Covariance is not a very useful measure of the strength of the relationship between rates of return.

If the covariance is negative, the rates of return on two investments will always move in different directions relative to their means

Which is NOT an assumption of capital market theory? A)Investments are not divisible. B)There is no inflation. C)There are no taxes or transaction costs.

Investments are not divisible

Which of the following statements about the above graph is least accurate? A)Investor X is less risk-averse than Investor Y. B)Investor X's expected return will always be less than that of Investor Y. C)The efficient frontier line represents the portfolios that provide the highest return at each risk level.

Investor X is less risk-averse than Investor Y

Which of the following is NOT an assumption of capital market theory? A)All assets are infinitely divisible. B)Investors can lend at the risk-free rate, but borrow at a higher rate. C)The capital markets are in equilibrium.

Investors can lend at the risk-free rate, but borrow at a higher rate

Which of the following statements about investment constraints is least accurate? A)Diversification efforts can increase tax liability. B)Investors concerned about time horizon are not likely to worry about liquidity. C)Unwillingness to invest in gambling stocks is a constraint.

Investors concerned about time horizon are not likely to worry about liquidity

Which of the following statements about the efficient frontier is least accurate? A)Investors will want to invest in the portfolio on the efficient frontier that offers the highest rate of return. B)Portfolios falling on the efficient frontier are fully diversified. C)The efficient frontier shows the relationship that exists between expected return and total risk in the absence of a risk-free asset.

Investors will want to invest in the portfolio on the efficient frontier that offers the highest rate of return

Which of the following statements regarding the Capital Asset Pricing Model is least accurate? A)It is useful for determining an appropriate discount rate. B)It is when the security market line (SML) and capital market line (CML) converge. C)Its accuracy depends upon the accuracy of the beta estimates.

It is when the security market line (SML) and capital market line (CML) converge

An investor's wealth is approximately 50% in bonds and broad-based equities and 50% in shares of a company she founded. Which of the following measures of risk-adjusted returns is least appropriate for this investor's portfolio? A)M-squared. B)Sharpe ratio. C)Jensen's alpha.

Jensen's alpha

Three portfolios have the following expected returns and risk: PortfolioExpected returnStandard deviationJones4%4%Kelly5%6%Lewis6%5% A risk-averse investor choosing from these portfolios could rationally select: A)Jones or Lewis, but not Kelly. B)Lewis, but not Kelly or Jones. C)Jones, but not Kelly or Lewis.

Jones or Lewis, but not Kelly

Historically, which of the following asset classes has exhibited the smallest standard deviation of monthly returns? A)Large-capitalization stocks. B)Long-term corporate bonds. C)Treasury bills.

Treasury bills

An analyst estimated the following for three possible investments. SecurityCurrent PriceForecast Price in One YearAnnual DividendBetaAlpha Inc.25.0031.002.001.6Lambda Inc.10.0010.8000.5Omega Inc.105.00110.001.001.2 Given an expected return on the market of 12% and a risk-free rate of 4%, which of the three securities is correctly priced based on the analyst's estimates? A)Alpha. B)Lambda. C)Omega.

Lambda

Which of the following factors is least likely to affect an investor's risk tolerance? A)Number of dependent family members. B)Level of inflation in the economy. C)Level of insurance coverage.

Level of inflation in the economy

Which of the following measures produces the same portfolio rankings as the Sharpe ratio but is stated in percentage terms? A)M-squared. B)Treynor measure. C)Jensen's alpha.

M-squared

Which of the following statements is NOT consistent with the assumption that individuals are risk averse with their investment portfolios? A)There is a positive relationship between expected returns and expected risk. B)Many individuals purchase lottery tickets. C)Higher betas are associated with higher expected returns.

Many individuals purchase lottery tickets

Which of the following risks is most accurately classified as a non-financial risk? A)Liquidity risk. B)Credit risk. C)Model risk.

Model risk

Which of the following is an assumption of the Capital Asset Pricing Model (CAPM)? A)Investors with shorter time horizons exhibit greater risk aversion. B)No investor is large enough to influence market prices. C)There are no margin transactions or short sales.

No investor is large enough to influence market prices

Which of the following pooled investment shares is least likely to trade at a price different from its NAV? A)Closed-end mutual fund shares. B)Open-end mutual fund shares. C)Exchange-traded fund shares.

Open-end mutual fund shares

Which of the following portfolios falls below the Markowitz efficient frontier? PortfolioExpected ReturnExpected Standard Deviation A12.1%8.5% B14.2%8.7% C15.1%8.7% A)Portfolio B. B)Portfolio C. C)Portfolio A.

Portfolio B

Which one of the following portfolios cannot lie on the efficient frontier? PortfolioExpected ReturnStandard Deviation A20%35% B11%13% C8%10% D8%9% A)Portfolio C. B)Portfolio D. C)Portfolio A.

Portfolio C

Which of the following possible portfolios is least likely to lie on the efficient frontier? PortfolioExpected ReturnStandard DeviationX9%12%Y11%10%Z13%15% A)Portfolio X. B)Portfolio Z. C)Portfolio Y.

Portfolio X

Charlie Smith holds two portfolios, Portfolio X and Portfolio Y. They are both liquid, well-diversified portfolios with approximately equal market values. He expects Portfolio X to return 13% and Portfolio Y to return 14% over the upcoming year. Because of an unexpected need for cash, Smith is forced to sell at least one of the portfolios. He uses the security market line to determine whether his portfolios are undervalued or overvalued. Portfolio X's beta is 0.9 and Portfolio Y's beta is 1.1. The expected return on the market is 12% and the risk-free rate is 5%. Smith should sell: A)portfolio Y only. B)both portfolios X and Y because they are both overvalued. C)either portfolio X or Y because they are both properly valued.

Portfolio Y

Which of the following is not necessarily included in an investment policy statement? A)A benchmark against which to judge performance. B)Procedures to update the IPS when circumstances change. C)An investment strategy based on the investor's objectives and constraints.

Procedures to update the IPS when circumstances change

Which of the following types of investors is likely to have the shortest investment horizon? A)Foundation. B)Life insurance company. C)Property and casualty insurance company.

Property and casualty insurance company

An investor buys a non-dividend paying stock for $100 at the beginning of the year with 50% initial margin. At the end of the year, the stock price is $95. Deflation of 2% occurred during the year. Which of the following return measures for this investment will be greatest? A)Leveraged return. B)Nominal return. C)Real return.

Real return

A portfolio manager is constructing a new equity portfolio consisting of a large number of randomly chosen domestic stocks. As the number of stocks in the portfolio increases, what happens to the expected levels of systematic and unsystematic risk? Systematic riskUnsystematic risk A)IncreasesRemains the same B)DecreasesIncreases C)Remains the sameDecreases

Remains the same Decreases

Which of the following statements about risk and return is least accurate? A)Return objectives may be stated in absolute terms. B)Risk and return may be considered on a mutually exclusive basis. C)Specifying investment objectives only in terms of return may expose an investor to inappropriately high levels of risk.

Risk and return may be considered on a mutually exclusive basis

Which of the following is least likely to be considered a constraint when preparing an investment policy statement? A)Liquidity needs. B)Risk tolerance. C)Tax concerns.

Risk tolerance

Which of the following is the vertical axis intercept for the Capital Market Line (CML)? A)Expected return on the portfolio. B)Risk-free rate. C)Expected return on the market.

Risk-free rate

The stock of Mia Shoes is currently trading at $15 per share, and the stock of Video Systems is currently trading at $18 per share. An analyst expects the prices of both stocks to increase by $2 over the next year and neither company pays dividends. Mia Shoes has a beta of 0.9 and Video Systems has a beta of (-0.3). If the expected market return is 15% and the risk-free rate is 8%, which trading strategy does the CAPM indicate for these two stocks? Mia ShoesVideo Systems A)BuyBuy B)BuySell C)SellBuy

Sell Buy

An analyst determines that three stocks have the following characteristics: StockBetaEstimated ReturnX1.010%Y1.616%Z2.016% If the risk-free rate is 4% and the expected return on the market is 10%, which of the following statements is most accurate? A)Stock X is undervalued. B)Stock Y is overvalued. C)Stock Z is properly valued.

Stock Z is properly valued

Which type of risk is positively related to expected excess ret urns according to the CAPM? A)Systematic. B)Diversifiable. C)Unique.

Systematic

Which of the following is least likely an assumption underlying the capital asset pricing model? A)Investors are rational. B)Tax rates are constant over the investment horizon. C)All investors have the same expectations of return and risk for each security.

Tax rates are constant over the investment horizon

Which of the following statements about the security market line (SML) and capital market line (CML) is most accurate? A)The SML involves the concept of a risk-free asset, but the CML does not. B)Both the SML and CML can be used to explain a stock's expected return. C)The SML uses beta, but the CML uses standard deviation as the risk measure.

The SML uses beta, but the CML uses standard deviation as the risk measure

The top-down analysis approach is most likely to be employed in which step of the portfolio management process? A)The planning step. B)The feedback step. C)The execution step.

The execution step

Which of the following statements about an organization's risk tolerance is most accurate? A)An organization with low risk tolerance should take steps to reduce each of the risks it identifies. B)Risk tolerance is the degree to which an organization is able to bear the various risks that may arise from outside the organization. C)The financial strength of an organization is one of the factors it should consider when determining its risk tolerance.

The financial strength of an organization is one of the factors it should consider when determining its risk tolerance

In a two-asset portfolio, reducing the correlation between the two assets moves the efficient frontier in which direction? A)The efficient frontier is stable unless return expectations change. If expectations change, the efficient frontier will extend to the upper right with little or no change in risk. B)The efficient frontier is stable unless the asset's expected volatility changes. This depends on each asset's standard deviation. C)The frontier extends to the left, or northwest quadrant representing a reduction in risk while maintaining or enhancing portfolio returns.

The frontier extends to the left, or northwest quadrant representing a reduction in risk while maintaining or enhancing portfolio returns

Which of the following statements about the security market line (SML) is least accurate? A)Securities plotting above the SML are undervalued. B)The SML measures risk using the standardized covariance of the stock with the market. C)The independent variable in the SML equation is the standard deviation of the market portfolio.

The independent variable in the SML equation is the standard deviation of the market portfolio

According to capital market theory, which of the following represents the risky portfolio that should be held by all investors who desire to hold risky assets? A)Any point on the efficient frontier and to the right of the point of tangency between the CML and the efficient frontier. B)The point of tangency between the capital market line (CML) and the efficient frontier. C)Any point on the efficient frontier and to the left of the point of tangency between the CML and the efficient frontier.

The point of tangency between the capital market line (CML) and the efficient frontier

Which of the following statements about the efficient frontier is least accurate? A)A portfolio that plots above efficient frontier is not attainable, while a portfolio that plots below the efficient frontier is inefficient. B)The efficient frontier is the set of portfolios with the greatest expected return for a given level of risk. C)The slope of the efficient frontier increases steadily as risk increases.

The slope of the efficient frontier increases steadily as risk increases

When a risk-free asset is combined with a portfolio of risky assets, which of the following is least accurate? A)The expected return for the newly created portfolio is the weighted average of the return on the risk-free asset and the expected return on the risky asset portfolio. B)The variance of the resulting portfolio is a weighted average of the returns variances of the risk-free asset and of the portfolio of risky assets. C)The standard deviation of the return for the newly created portfolio is the standard deviation of the returns of the risky asset portfolio multiplied by its portfolio weight.

The variance of the resulting portfolio is a weighted average of the returns variances of the risk-free asset and of the portfolio of risky assets.

Which of the following statements best describes an investment that is not on the efficient frontier? A)There is a portfolio that has a lower return for the same risk. B)There is a portfolio that has a lower risk for the same return. C)The portfolio has a very high return.

There is a portfolio that has a lower risk for the same return

Which of the following statements about risk is NOT correct? A)The market portfolio has only systematic risk. B)Total risk = systematic risk - unsystematic risk. C)Unsystematic risk is diversifiable risk.

Total risk = systematic risk + unsystematic risk

Which of the following terms refer to the same type of risk? A)Systematic risk and firm-specific risk. B)Total risk and the variance of returns. C)Undiversifiable risk and unsystematic risk.

Total risk and the variance of returns

Which of the following statements about systematic and unsystematic risk is most accurate? A)As an investor increases the number of stocks in a portfolio, the systematic risk will remain constant. B)The unsystematic risk for a specific firm is similar to the unsystematic risk for other firms. C)Total risk equals market risk plus firm-specific risk.

Total risk equals market risk plus firm-specific risk

Betsy Minor is considering the diversification benefits of a two stock portfolio. The expected return of stock A is 14 percent with a standard deviation of 18 percent and the expected return of stock B is 18 percent with a standard deviation of 24 percent. Minor intends to invest 40 percent of her money in stock A, and 60 percent in stock B. The correlation coefficient between the two stocks is 0.6. What is the variance and standard deviation of the two stock portfolio? A)Variance = 0.02206; Standard Deviation = 14.85%. B)Variance = 0.03836; Standard Deviation = 19.59%. C)Variance = 0.04666; Standard Deviation = 21.60%.

Variance = 0.03836; Standard Deviation = 19.59%

Which of the following pooled investments is least likely to employ large amounts of leverage? A)Private equity buyout fund. B)Global macro hedge fund. C)Venture capital fund.

Venture capital fund

An executive describes her company's "low latency, multiple terabyte" requirements for managing Big Data. To which characteristics of Big Data is the executive referring? A)Velocity and variety. B)Volume and variety. C)Volume and velocity.

Volume and velocity

Which of the following statements about portfolio theory is least accurate? A)Assuming that the correlation coefficient is less than one, the risk of the portfolio will always be less than the simple weighted average of individual stock risks. B)For a two-stock portfolio, the lowest risk occurs when the correlation coefficient is close to negative one. C)When the return on an asset added to a portfolio has a correlation coefficient of less than one with the other portfolio asset returns but has the same risk, adding the asset will not decrease the overall portfolio standard deviation.

When the return on an asset added to a portfolio has a correlation coefficient of less than one with the other portfolio asset returns but has the same risk, adding the asset will not decrease the overall portfolio standard deviation

Which of the following is typically the first general step in the portfolio management process? A)Write a policy statement. B)Develop an investment strategy. C)Specify capital market expectations.

Write a policy statement

An investor believes Stock M will rise from a current price of $20 per share to a price of $26 per share over the next year. The company is not expected to pay a dividend. The following information pertains: RF = 8% ERM = 16% Beta = 1.7 Should the investor purchase the stock? A)No, because it is overvalued. B)No, because it is undervalued. C)Yes, because it is undervalued.

Yes, because it is undervalued

An investor has identified the following possible portfolios. Which portfolio cannot be on the efficient frontier? PortfolioExpected ReturnStandard DeviationV18%35%W12%16%X10%10%Y14%20%Z13%24% A)X. B)Y. C)Z.

Z

A firm that invests the majority of a portfolio to track a benchmark index, and uses active investment strategies for the remaining portion, is said to be using: A)a core-satellite approach. B)risk budgeting. C)strategic asset allocation.

a core-satellite approach

Promised payments to pension beneficiaries are a responsibility of the plan sponsor in: A)both a defined benefit plan and a defined contribution plan. B)a defined contribution plan only. C)a defined benefit plan only.

a defined benefit plan only

A higher Sharpe ratio indicates: A)a higher excess return per unit of risk. B)a lower risk per unit of return. C)lower volatility of returns.

a higher excess return per unit of risk

The market portfolio in Capital Market Theory is determined by: A)a line tangent to the efficient frontier, drawn from any point on the expected return axis. B)a line tangent to the efficient frontier, drawn from the risk-free rate of return. C)the intersection of the efficient frontier and the investor's highest utility curve.

a line tangent to the efficient frontier, drawn from the risk-free rate of return

Over the long term, the annual returns and standard deviations of returns for major asset classes have shown: A)a negative relationship. B)a positive relationship. C)no clear relationship.

a positive relationship

Beta is least accurately described as: A)the covariance of a security's returns with the market return, divided by the variance of market returns. B)a standardized measure of the total risk of a security. C)a measure of the sensitivity of a security's return to the market return.

a standardized measure of the total risk of a security

A plot of the expected returns and standard deviations of each possible portfolio that combines a risky asset and a risk-free asset will be: A)convex to the origin. B)a curve that approaches an upper limit. C)a straight line.

a straight line

A stock's abnormal rate of return is defined as the: A)expected risk-adjusted rate of return minus the market rate of return. B)actual rate of return less the expected risk-adjusted rate of return. C)rate of return during abnormal price movements.

actual rate of return less the expected risk-adjusted rate of return

Determining the optimal execution instructions for an order to buy a security is most likely to be an application of: A)text analytics. B)natural language processing. C)algorithmic trading.

algorithmic trading

In the context of the CML, the market portfolio includes: A)12-18 stocks needed to provide maximum diversification. B)all existing risky assets. C)the risk-free asset.

all existing risky assets

According to the capital asset pricing model (CAPM): A)an investor who is risk averse should hold at least some of the risk-free asset in his portfolio. B)all investors who take on risk will hold the same risky-asset portfolio. C)a stock with high risk, measured as standard deviation of returns, will have high expected returns in equilibrium.

all investors who take on risk will hold the same risky-asset portfolio

An investment manager is most likely to be engaging in tactical asset allocation if she: A)allocates 5% to cash, 20% to fixed income, and 75% to equities based on the investor's long time horizon and high risk tolerance. B)increases the allocation to tax-free bonds because the investor's effective tax rate has increased. C)allocates more than the targeted 10% to emerging market bonds because the sector appears to be undervalued.

allocates more than the targeted 10% to emerging market bonds because the sector appears to be undervalued

In the top-down approach to asset allocation, industry analysis should be conducted before company analysis because: A)the goal of the top-down approach is to identify those companies in non-cyclical industries with the lowest P/E ratios. B)an industry's prospects within the global business environment are a major determinant of how well individual firms in the industry perform. C)most valuation models recommend the use of industry-wide average required returns, rather than individual returns.

an industry's prospects within the global business environment are a major determinant of how well individual firms in the industry perform

When performing strategic asset allocation, properly defined and specified asset classes should: A)approximate the investor's total investable universe as a group. B)each contain assets that have a broad range of risk and expected return. C)have high returns correlations with other asset classes.

approximate the investor's total investable universe as a group

Time-weighted returns are used by the investment management industry because they: A)result in higher returns versus the money-weighted return calculation. B)take all cash inflows and outflows into account using the internal rate of return. C)are not affected by the timing of cash flows.

are not affected by the timing of cash flows

When comparing portfolios that plot on the security market line (SML) to those that plot on the capital market line (CML), a financial analyst would most accurately state that portfolios that lie on the SML: A)are not necessarily priced at their equilibrium values, while portfolios on the CML are priced at their equilibrium values. B)are not necessarily well diversified, while portfolios on the CML are well diversified. C)have only systematic risk, while portfolios on the CML have both systematic and unsystematic risk.

are not necessarily well diversified, while portfolios on the CML are well diversified

Portfolios on the capital market line: A)each contain different risky assets. B)are perfectly positively correlated with each other. C)include some positive allocation to the risk-free asset.

are perfectly positively correlated with each other

A trend is most likely to continue if the price chart displays a(n): A)inverse head and shoulders pattern. B)ascending triangle pattern. C)double top.

ascending triangle pattern

The execution step in the portfolio management process is most likely to include: A)asset allocation and security analysis. B)performance measurement and portfolio rebalancing. C)preparation of an investment policy statement.

asset allocation and security analysis

A technical analyst who identifies a decennial pattern and a Kondratieff wave most likely: A)associates these phenomena with U.S. presidential elections. B)is analyzing a daily or intraday price chart. C)believes market prices move in cycles.

believes market prices move in cycles

In equilibrium, an inefficient portfolio will plot: A)below the CML and on the SML. B)below the CML and below the SML. C)on the CML and below the SML.

below the CML and on the SML

Calculating the variance of a two-asset portfolio least likely requires inputs for each asset's: A)beta. B)weight in the portfolio. C)standard deviation.

beta

Measures of interest rate sensitivity least likely include: A)beta. B)duration. C)rho.

beta

The slope of the characteristic line is used to estimate: A)risk aversion. B)beta. C)a risk premium.

beta

For an investor to move further up the Capital Market Line than the market portfolio, the investor must: A)diversify the portfolio even more. B)reduce the portfolio's risk below that of the market. C)borrow and invest in the market portfolio.

borrow and invest in the market portfolio

Bruce Johansen, CFA, is fully invested in the market portfolio. Johansen desires to increase the expected return from his portfolio. According to capital market theory, Johansen can meet his return objective by: A)owning the risky market portfolio and lending at the risk-free rate. B)allocating a higher proportion of the portfolio to higher risk assets. C)borrowing at the risk-free rate to invest in the risky market portfolio.

borrowing at the risk-free rate to invest in the risky market portfolio

A line that represents the possible portfolios that combine a risky asset and a risk free asset is most accurately described as a: A)capital allocation line. B)capital market line. C)characteristic line.

capital allocation line

Portfolios that represent combinations of the risk-free asset and the market portfolio are plotted on the: A)utility curve. B)capital market line. C)capital asset pricing line.

capital market line

Point and figure charts are most likely to illustrate: A)changes of direction in price trends. B)significant increases or decreases in volume. C)the length of time over which trends persist.

changes of direction in price trends

A pooled investment with a share price significantly different from its net asset value (NAV) per share is most likely a(n): A)open-end fund. B)exchange-traded fund. C)closed-end fund.

closed-end fund

Artificial intelligence is best described as: A)computer systems that emulate human thinking. B)networks of smart devices and buildings. C)the field of study concerned with extracting information from data.

computer systems that emulate human thinking

All portfolios that lie on the capital market line: A)contain at least some positive allocation to the risk-free asset. B)have some unsystematic risk unless only the risk-free asset is held. C)contain the same mix of risky assets unless only the risk-free asset is held.

contain the same mix of risky assets unless only the risk-free asset is held

The portfolio approach to investing is best described as evaluating each potential investment based on its: A)potential to generate excess return for the investor. B)fundamentals such as the financial performance of the security issuer. C)contribution to the investor's overall risk and return.

contribution to the investor's overall risk and return

Examples of financial risks include: A)credit risk, market risk, and liquidity risk. B)market risk, liquidity risk, and tax risk. C)solvency risk, credit risk, and market risk.

credit risk, market risk, and liquidity risk

Investors in an initial coin offering (ICO) typically receive: A)registered securities. B)voting rights in the ICO issuer. C)cryptocurrency.

cryptocurrency

A bond analyst is looking at historical returns for two bonds, Bond 1 and Bond 2. Bond 2's returns are much more volatile than Bond 1. The variance of returns for Bond 1 is 0.012 and the variance of returns of Bond 2 is 0.308. The correlation between the returns of the two bonds is 0.79, and the covariance is 0.048. If the variance of Bond 1 increases to 0.026 while the variance of Bond 2 decreases to 0.188 and the covariance remains the same, the correlation between the two bonds will: A)decrease. B)increase. C)remain the same.

decrease

A portfolio manager adds a new stock that has the same standard deviation of returns as the existing portfolio but has a correlation coefficient with the existing portfolio that is less than +1. Adding this stock will have what effect on the standard deviation of the revised portfolio's returns? The standard deviation will: A)decrease only if the correlation is negative. B)decrease. C)increase.

decrease

High risk tolerance, a long investment horizon, and low liquidity needs are most likely to characterize the investment needs of a(n): A)insurance company. B)defined benefit pension plan. C)bank.

defined benefit pension plan

A support level is the price range at which a technical analyst would expect the: A)demand for a stock to decrease substantially. B)demand for a stock to increase substantially. C)supply of a stock to decrease substantially.

demand for a stock to increase substantially

Features of a risk management framework least likely include: A)disciplining managers who exceed their risk budgets. B)monitoring the organization's risk exposures. C)establishing risk governance policies and processes.

disciplining managers who exceed their risk budgets

The ratio of an equally weighted portfolio's standard deviation of return to the average standard deviation of the securities in the portfolio is known as the: A)diversification ratio. B)relative risk ratio. C)Sharpe ratio.

diversification ratio

In the Markowitz framework, an investor should most appropriately evaluate a potential investment based on its: A)effect on portfolio risk and return. B)expected return. C)intrinsic value compared to market value.

effect on portfolio risk and return

Based on a questionnaire about investment risk, an advisor concludes that an investor's risk tolerance is high, but based on an analysis of the client's income needs and time horizon, he concludes the investor's risk tolerance is low. The most appropriate action for the advisor is to: A)emphasize stocks over bonds. B)emphasize bonds over stocks. C)educate the client about investment risk and re-administer the questionnaire.

emphasize bonds over stocks

In a defined contribution pension plan, investment risk is borne by the: A)employee. B)employer. C)plan manager.

employee

The slope of the capital market line (CML) is a measure of the level of: A)excess return per unit of risk. B)expected return over the level of inflation. C)risk over the level of excess return.

excess return per unit of risk

Which of the following statements regarding the Sharpe ratio is most accurate? The Sharpe ratio measures: A)excess return per unit of risk. B)peakedness of a return distribution. C)total return per unit of risk.

excess return per unit of risk

A security portfolio earns a gross return of 7.0% and a net return of 6.5%. The difference of 0.5% most likely results from: A)fees. B)taxes. C)inflation.

fees

In Fama and French's multifactor model, the expected return on a stock is explained by: A)excess return on the market portfolio, book-to-market ratio, and price momentum. B)firm size, book-to-market ratio, and excess return on the market portfolio. C)firm size, book-to-market ratio, and price momentum.

firm size, book-to-market ration, and excess return on the market portfolio

Which of the following would be assessed first in a top-down valuation approach? A)Fiscal policy. B)Industry return on equity (ROE). C)Industry risks.

fiscal policy

Elliott wave theory describes the typical pattern of price movements as: A)five waves with the direction of the trend, followed by four waves against the direction of the trend. B)five waves with the direction of the trend, followed by three waves against the direction of the trend. C)four waves with the direction of the trend, followed by three waves against the direction of the trend.

five waves with the direction of the trend, followed by three waves against the direction of the trend

An Elliott wave theorist who forecasts prices based on Fibonacci ratios is most likely to predict that a wave will be: A)six-elevenths the size of the previous wave. B)four-ninths the size of the previous wave. C)five-eighths the size of the previous wave.

five-eighths the size of the previous wave

An asset manager's portfolio had the following annual rates of return: YearReturn20X7+6%20X8-37%20X9+27% The manager states that the return for the period is −5.34%. The manager has reported the: A)arithmetic mean return. B)geometric mean return. C)holding period return.

geometric mean return

An investor with a buy-and-hold strategy who makes quarterly deposits into an account should most appropriately evaluate portfolio performance using the portfolio's: A)arithmetic mean return. B)geometric mean return. C)money-weighted return.

geometric mean return

As the correlation between the returns of two assets becomes lower, the risk reduction potential becomes: A)smaller. B)greater. C)decreased by the same level.

greater

An equally weighted portfolio of a risky asset and a risk-free asset will exhibit: A)half the returns standard deviation of the risky asset. B)less than half the returns standard deviation of the risky asset. C)more than half the returns standard deviation of the risky asset.

half the returns standard deviation of the risky asset

A trend is most likely to reverse if the price chart displays a: A)descending triangle pattern. B)head and shoulders pattern. C)rectangle pattern.

head and shoulders pattern

A contrarian technical analyst is most likely to be bullish based on a: A)low mutual fund cash position. B)high volatility index. C)low put-call ratio.

high volatility index

Over long periods of time, compared to fixed income securities, equities have tended to exhibit: A)higher average annual returns and higher standard deviation of returns. B)higher average annual returns and lower standard deviation of returns. C)lower average annual returns and higher standard deviation of returns.

higher average annual returns and higher standard deviation of returns

The basic premise of the risk-return trade-off suggests that risk-averse individuals purchasing investments with higher non-diversifiable risk should expect to earn: A)rates of return equal to the market. B)higher rates of return. C)lower rates of return.

higher rates of return

The optimal portfolio in the Markowitz framework occurs when an investor achieves the diversified portfolio with the: A)lowest risk. B)highest return. C)highest utility.

highest utility

A portfolio to the right of the market portfolio on the capital market line (CML) is created by: A)holding more than 100% of the risky asset. B)holding both the risk-free asset and the market portfolio. C)fully diversifying.

holding more than 100% of the risky asset

Operational risk is most accurately described as the risk that: A)human error or faulty processes will cause losses. B)the organization will run out of operating cash. C)extreme events are more likely than managers have assumed.

human error or faulty processes will cause losses

Which of the following is NOT a rationale for the importance of the policy statement in investing? It: A)forces investors to understand their needs and constraints. B)identifies specific stocks the investor may wish to purchase. C)helps investors understand the risks and costs of investing.

identifies specific stocks the investor may wish to purchase

An objective of the risk management process is to: A)eliminate the risks faced by an organization. B)identify the risks faced by an organization. C)minimize the risks faced by an organization.

identify the risks faced by an organization

Risk aversion means that an individual will choose the less risky of two assets: A)in all cases. B)even if it has a lower expected return. C)if they have the same expected return.

if they have the same expected return

The resistance level signifies the price at which a stock's supply would be expected to: A)cause the stock price to "break out". B)increase substantially. C)decrease substantially.

increase substantially

Risk management within an organization should most appropriately consider: A)financial risks independently of non-financial risks. B)internal risks independently of external risks. C)interactions among different risks.

interactions among different risks

Asset allocation using technical analysis is most likely to be based on: A)a stochastic oscillator. B)correlations within asset classes. C)intermarket analysis.

intermarket analysis

According to Markowitz, an investor's optimal portfolio is determined where the: A)investor's lowest utility curve is tangent to the efficient frontier. B)investor's highest utility curve is tangent to the efficient frontier. C)investor's utility curve meets the efficient frontier.

investor's highest utility curve is tangent to the efficient frontier

A stock that plots below the Security Market Line most likely: A)is overvalued. B)has a beta less than one. C)is below the efficient frontier.

is overvalued

Which of the following statements about the optimal portfolio is NOT correct? The optimal portfolio: A)may be different for different investors. B)lies at the point of tangency between the efficient frontier and the indifference curve with the highest possible utility. C)is the portfolio that gives the investor the maximum level of return.

is the portfolio that gives the investor the maximum level of return

Consider a stock selling for $23 that is expected to increase in price to $27 by the end of the year and pay a $0.50 dividend. If the risk-free rate is 4%, the expected return on the market is 8.5%, and the stock's beta is 1.9, what is the current valuation of the stock? The stock: A)is correctly valued. B)is overvalued. C)is undervalued.

is undervalued

An endowment is required by statute to pay out a minimum percentage of its asset value each period to its beneficiaries. This investment constraint is best classified as: A)legal and regulatory. B)liquidity. C)unique circumstances.

legal and regulatory

Which of the following inputs is least likely required for the Markowitz efficient frontier? The: A)expected return of all securities. B)covariation between all securities. C)level of risk aversion in the market.

level of risk aversion in the market

A technical analysis chart that illustrates only the closing prices of a security on each trading day is best described as a: A)bar chart. B)line chart. C)point and figure chart.

line chart

An individual investor specifies to her investment advisor that her portfolio must produce a minimum amount of cash each period. This investment constraint is best classified as: A)legal and regulatory. B)liquidity. C)unique circumstances.

liquidity

Endowments and foundations typically have investment needs that can be characterized as: A)long time horizon, high risk tolerance, and low liquidity needs. B)long time horizon, low risk tolerance, and high liquidity needs. C)short time horizon, low risk tolerance, and low liquidity needs.

long time horizon, high risk tolerance, and low liquidity needs

The trend line for a stock in an uptrend is constructed by drawing a straight line through the: A)periodic averages. B)lows. C)highs.

lows

A technical analyst believes stock prices are primarily driven by: A)unobservable shifts in market sentiment. B)market supply and demand forces. C)rational behavior among market participants.

market supply and demand forces

Portfolios that plot on the security market line in equilibrium: A)may be concentrated in only a few stocks. B)must be well diversified. C)have only systematic (beta) risk.

may only be concentrated in a few stocks

A mutual fund that invests in short-term debt securities and maintains a net asset value of $1.00 per share is best described as a: A)balanced fund. B)bond mutual fund. C)money market fund.

money market fund

In the market model, beta measures the sensitivity of an asset's rate of return to the market's: A)rate of return. B)risk-adjusted return. C)excess return.

rate of return

Which of the following is most accurate with respect to the relationship of the money-weighted return to the time-weighted return? If funds are contributed to a portfolio just prior to a period of favorable performance, the: A)money-weighted rate of return will tend to be depressed. B)money-weighted rate of return will tend to be elevated. C)time-weighted rate of return will tend to be elevated.

money-weighted rate of return will tend to be elevated

Computing the internal rate of return of the inflows and outflows of a portfolio would give the: A)money-weighted return. B)net present value. C)time-weighted return.

money-weighted return

A portfolio currently holds Randy Co. and the portfolio manager is thinking of adding either XYZ Co. or Branton Co. to the portfolio. All three stocks offer the same expected return and total risk. The covariance of returns between Randy Co. and XYZ is +0.5 and the covariance between Randy Co. and Branton Co. is -0.5. The portfolio's risk would decrease: A)more if she bought Branton Co. B)more if she bought XYZ Co. C)most if she put half your money in XYZ Co. and half in Branton Co.

more if she bought Branton Co.

Smith has more steeply sloped risk-return indifference curves than Jones. Assuming these investors have the same expectations, which of the following best describes their risk preferences and the characteristics of their optimal portfolios? Smith is: A)more risk averse than Jones and will choose an optimal portfolio with a higher expected return. B)less risk averse than Jones and will choose an optimal portfolio with a lower expected return. C)more risk averse than Jones and will choose an optimal portfolio with a lower expected return.

more risk averse than Jones and will choose an optimal portfolio with a lower expected return

MAL Investments is an asset management company that consists of three subsidiaries: one that focuses on mid-cap value stocks, one that focuses on alternative assets, and one that focuses on long-term emerging market sovereign debt. MAL is most accurately described as a: A)full-service asset manager. B)multi-boutique firm. C)specialist asset manager.

multi-boutique firm

An active manager will most likely short a security with an expected Jensen's alpha that is: A)negative. B)positive. C)zero.

negative

Mason Snow, CFA, is considering two stocks: Bahre (with an expected return of 10% and a beta of 1.4) and Cubb (with an expected return of 15% and a beta of 2.0). Snow uses a risk-free of 7% and estimates that the market risk premium is 4%. Based on capital market theory, Snow should conclude that: A)neither security is underpriced. B)only Bahre is underpriced. C)only Cubb is underpriced.

neither security is underpriced

In equilibrium, investors should only expect to be compensated for bearing systematic risk because: A)individual securities in equilibrium only have systematic risk. B)nonsystematic risk can be eliminated by diversification. C)systematic risk is specific to the securities the investor selects.

nonsystematic risk can be eliminated by diversification

Open-end mutual funds differ from closed-end funds in that: A)closed-end funds require active management, while open-end funds do not. B)open-end funds issue shares that are then traded in secondary markets, while closed-end funds do not. C)open-end funds stand ready to redeem their shares, while closed-end funds do not.

open-end funds stand ready to redeem their shares, while closed-end funds do not.

Constructing a candlestick chart requires data on: A)opening, high, low, and closing prices only. B)opening, high, low, and closing prices, and trading volume. C)high, low, and closing prices only.

opening, high, low, and closing prices only

The following information is available for the stock of Park Street Holdings: The price today (P0) equals $45.00. The expected price in one year (P1) is $55.00. The stock's beta is 2.31. The firm typically pays no dividend. The 3-month Treasury bill is yielding 4.25%. The historical average S&P 500 return is 12.5%. Park Street Holdings stock is: A)undervalued by 3.7%. B)overvalued by 1.1%. C)undervalued by 1.1%.

overvalued by 1.1%

If two stocks have positive covariance: A)their rates of return tend to change in the same direction. B)they exhibit a strong correlation of returns. C)they are likely to be in the same industry.

their rates of return tend to change in the same direction

An analyst wants to determine whether Dover Holdings is overvalued or undervalued, and by how much (expressed as percentage return). The analyst gathers the following information on the stock: Market standard deviation = 0.70 Covariance of Dover with the market = 0.85 Dover's current stock price (P0) = $35.00 The expected price in one year (P1) is $39.00 Expected annual dividend = $1.50 3-month Treasury bill yield = 4.50%. Historical average S&P 500 return = 12.0%. Dover Holdings stock is: A)undervalued by approximately 1.8%. B)overvalued by approximately 1.8%. C)undervalued by approximately 2.1%.

overvalued by approximately 1.8%

Which of the following statements about active and passive asset management is most accurate? A)Passive management's share of industry revenues is smaller than its share of assets under management. B)Active management may use fundamental analysis, technical analysis, or a "smart beta" approach to outperform a chosen benchmark. C)Active management has been gaining market share over time versus passive management.

passive management's shares of industry revenue is smaller than its share of assets under management

Identifying a benchmark for a client portfolio is most likely to be part of the: A)execution step. B)feedback step. C)planning step.

planning step

Based on Capital Market Theory, an investor should choose the: A)market portfolio on the Capital Market Line. B)portfolio that maximizes his utility on the Capital Market Line. C)portfolio with the highest return on the Capital Market Line.

portfolio that maximizes his utility on the Capital Market Line

In extending the 3-factor model of Fama and French, the additional factor suggested by Carhart that is often used is: A)price momentum. B)GDP growth. C)market-to-book value.

price momentum

A pooled investment fund buys all the shares of a publicly traded company. The fund reorganizes the company and replaces its management team. Three years later, the fund exits the investment through an initial public offering of the company's shares. This pooled investment fund is best described as a(n): A)event-driven fund. B)private equity fund. C)venture capital fund.

private equity fund

The risk-free rate is 5% and the expected market return is 15%. A portfolio manager is estimating a return of 20% on a stock with a beta of 1.5. Based on the SML and the analyst's estimate, this stock is: A)properly valued. B)undervalued. C)overvalued.

properly valued

Level I CFA candidate Adeline Bass is a member of an investment club. At the next meeting, she is to recommend whether or not the club should purchase the stocks of CS Industries and MG Consolidated. The risk-free rate is at 6% and the expected return on the market is 15%. Prior to the meeting, Bass gathers the following information on the two stocks: CS IndustriesMG ConsolidatedCurrent Market Value$25$50Expected Market Value in One Year$30$55Expected Dividend$1$1Beta1.20.80 Bass should recommend that the club: A)purchase both stocks. B)purchase CS only. C)purchase MG only.

purchase CS only

When technical analysts say a stock has good "relative strength," they mean the: A)ratio of the price of the stock to a market index has trended upward. B)recent trading volume in the stock has exceeded the normal trading volume. C)stock has performed well compared to other stocks in the same risk category as measured by beta.

ratio of the price of the stock to a market index has trended upward

The most appropriate measure of the increase in the purchasing power of a portfolio's value over a given span of time is a(n): A)after-tax return. B)holding period return. C)real return.

real return

The most appropriate tool to use for intermarket analysis of two different asset classes is a: A)stochastic oscillator. B)moving average convergence/divergence chart. C)relative strength chart.

relative strength chart

A stock has an expected return of 4% with a standard deviation of returns of 6%. A bond has an expected return of 4% with a standard deviation of 7%. An investor who prefers to invest in the stock rather than the bond is best described as: A)risk averse. B)risk neutral. C)risk seeking.

risk averse

Categories of investment constraints in an investment policy statement least likely include: A)tax concerns. B)risk tolerance. C)liquidity needs.

risk tolerance

Which of the following is the most accurate description of the market portfolio in Capital Market Theory? The market portfolio consists of all: A)equity securities in existence. B)risky and risk-free assets in existence. C)risky assets in existence.

risky assets in existence

A portfolio manager uses a computer model to estimate the effect on a portfolio's value from both a 3% increase in interest rates and a 5% depreciation in the euro relative to the yen. The manager is most accurately described as engaging in: A)scenario analysis. B)risk shifting. C)stress testing.

scenario analysis

Which of the following is an assumption of capital market theory? All investors: A)have multiple-period time horizons. B)see the same risk/return distribution for a given stock. C)select portfolios that lie above the efficient frontier to optimize the risk-return relationship.

see the same risk/return distribution for a given stock

Risk governance is best described as: A)determining an organization's risk tolerance. B)allocating an organization's resources by considering their risk characteristics. C)senior management's oversight of the organization's risk management.

senior management's oversight of the organization's risk management

A model that estimates expected excess return on a security based on the ratio of the firm's book value to its market value is best described as a: A)market model. B)multifactor model. C)single-factor model.

single-factor model

The market model of the expected return on a risky security is best described as a(n): A)arbitrage-based model. B)single-factor model. C)two-factor model.

single-factor model

Technical analysts who employ Elliott Wave Theory are most likely to use Fibonacci numbers to forecast the: A)number of subwaves within a larger wave. B)sizes of waves. C)timing of wave direction changes. Explanation

sizes of waves

Which of the following statements about risk is NOT correct? Generally, greater: A)existing wealth allows for greater risk. B)insurance coverage allows for greater risk. C)spending needs allows for greater risk.

spending needs allows for greater risk

What is the risk measure associated with the CML? A)Beta. B)Market risk. C)Standard deviation.

standard deviation

Bollinger bands are drawn based on the: A)difference between two smoothed moving averages. B)high and low prices in a recent period. C)standard deviation of recent price changes.

standard deviation of recent price changes

The technique in which a machine learns to model a set of output data from a given set of inputs is best described as: A)deep learning. B)supervised learning. C)unsupervised learning.

supervised learning

One of the assumptions of technical analysis is: A)all analysts have all current information. B)supply and demand are driven by rational and irrational behavior. C)the market is efficient.

supply and demand are driven by rational and irrational behavior

The point where technicians expect a substantial increase in the demand for a stock to occur is called a: A)resistance level. B)break-out point. C)support level.

support level

Beta is a measure of: A)company-specific risk. B)systematic risk. C)total risk.

systematic risk

A portfolio manager who believes equity securities are overvalued in the short term reduces the weight of equities in her portfolio to 35% from its longer-term target weight of 40%. This decision is best described as an example of: A)rebalancing. B)strategic asset allocation. C)tactical asset allocation.

tactical asset allocation

Value-at-Risk (VaR) and Conditional VaR are best described as measures of: A)liquidity risk. B)model risk. C)tail risk.

tail risk

Which of the following would least likely be considered a minimum requirement of an IPS? A(n): A)target return figure. B)benchmark portfolio. C)investment strategy based on client circumstances and constraints.

target return figure

All of the following affect an investor's risk tolerance EXCEPT: A)tax bracket. B)years of experience with investing in the markets. C)family situation.

tax bracket

Davis Samuel, CFA, is meeting with one of his portfolio management clients, Joseph Pope, to discuss Pope's investment constraints. Samuel has established that: Pope plans to retire from his job as a bond salesman in 17 years, after which this portfolio will be his primary source of income. Pope has sufficient cash available that he will not need this portfolio to generate cash outflows until he retires. Pope, as a registered securities representative, is required to have Samuel send a copy of his account statements to the compliance officer at Pope's employer. Pope opposes certain policies of the government of Lower Pannonia and does not wish to own any securities of companies that do business with its regime. To complete his assessment of Pope's investment constraints, Samuel still needs to inquire about Pope's: A)unique circumstances. B)liquidity needs. C)tax concerns.

tax concerns

An investment manager has constructed an efficient frontier based on a client's investable asset classes. The strategic asset allocation for the client should be the asset allocation of one of these efficient portfolios, selected based on: A)the relative valuations of the investable asset classes. B)a risk budgeting process. C)the client's investment objectives and constraints.

the client's investment objectives and constraints

There are benefits to diversification as long as: A)the correlation coefficient between the assets is less than 1. B)there is perfect positive correlation between the assets. C)there must be perfect negative correlation between the assets.

the correlation between the assets is less than 1

In a defined benefit pension plan: A)the employee is promised a periodic payment upon retirement. B)the employee is responsible for making investment decisions. C)the employer's pension expense is equal to its contributions to the plan.

the employee is promised a periodic payment upon retirement

Consider the following graph of the Security Market Line (SML). The letters X, Y, and Z represent risky asset portfolios and an analyst's forecast for their returns over the next period. The SML crosses the y-axis at 0.07. The expected market return is 13.0%. Using the graph above and the information provided, the analyst most likely believes that: A)Portfolio X's required return is greater than its forecast return. B)Portfolio Y is undervalued. C)the expected return for Portfolio Z is 14.8%.

the expected return for Portfolio Z is 14.8%

According to the CAPM, a rational investor would be least likely to choose as his optimal portfolio: A)the global minimum variance portfolio. B)a 100% allocation to the risk-free asset. C)a 130% allocation to the market portfolio.

the global minimum variance portfolio

The efficient frontier is best described as the set of attainable portfolios that gives investors: A)the lowest risk for any given level of risk tolerance. B)the highest expected return for any given level of risk. C)the highest diversification ratio for any given level of expected return.

the highest expected return for any given level of risk

The advantages of using technical analysis include: A)complete objectivity. B)ease in interpreting reasons behind stock price trends. C)the incorporation of psychological reasons behind price changes.

the incorporation of psychological reasons behind price changes.

The particular portfolio on the efficient frontier that best suits an individual investor is determined by: A)the individual's utility curve. B)the current market risk-free rate as compared to the current market return rate. C)the individual's asset allocation plan.

the individual's utility curve

The major components of a typical investment policy statement (IPS) least likely include: A)the investment manager's compensation. B)investment objectives. C)duties and responsibilities of the investment manager.

the investment manager's compensation

A head and shoulders pattern is most likely to precede a reversal in trend if: A)the left shoulder, the head, and the right shoulder occur on decreasing volume. B)volume decreases between the left shoulder and the head, then increases between the head and the right shoulder. C)the left shoulder, the head, and the right shoulder occur on increasing volume.

the left shoulder, the head, and the right shoulder occur on decreasing volume

James Franklin, CFA, has high risk tolerance and seeks high returns. Based on capital market theory, Franklin would most appropriately hold: A)a high-beta portfolio of risky assets financed in part by borrowing at the risk-free rate. B)a high risk biotech stock, as it will have high expected returns in equilibrium. C)the market portfolio as his only risky asset.

the market portfolio as his only risky asset

Under which of these conditions is a machine learning model said to be underfit? A)The input data are not labeled. B)The model identifies spurious relationships. C)The model treats true parameters as noise.

the model treats true parameters as noise

An inverse head and shoulders pattern most likely indicates: A)the continuation of a downtrend. B)the reversal of a downtrend. C)the reversal of an uptrend.

the reversal of a downtrend

On a graph of risk, measured by standard deviation and expected return, the efficient frontier represents: A)the set of portfolios that dominate all others as to risk and return. B)all portfolios plotted in the northeast quadrant that maximize return. C)the group of portfolios that have extreme values and therefore are "efficient" in their allocation.

the set of portfolios that dominate all others as to risk and return

A technical analyst who wishes to observe the state of capital flows in the financial markets is least likely to examine: A)margin debt. B)the short interest ratio. C)the cash position of mutual funds.

the short interest ratio

One of the assumptions underlying the capital asset pricing model is that: A)each investor has a unique time horizon. B)only whole shares or whole bonds are available. C)there are no transactions costs or taxes.

there are no transactions costs or taxes

A government decides it will privatize vehicle registrations if the province's auto insurance companies can record and maintain ownership titles using distributed ledger technology. This application of distributed ledger technology is best characterized as: A)blockchain. B)smart contracts. C)tokenization.

tokenization

Robo-advisory services are most likely to be appropriate for an investor who is interested in: A)actively managed investments. B)high-frequency trading. C)traditional asset classes.

traditional asset classes

Buying insurance is best described as a method for an organization to: A)prevent a risk. B)shift a risk. C)transfer a risk.

transfer a risk

Which of the following portfolio constraints in the Investment Policy Statement of a local college's endowment most likely belongs in the "unique circumstances" category? The endowment is: A)exempt from taxes. B)subject to oversight by a regulatory authority. C)unwilling to invest in companies that sell weapons.

unwilling to invest in companies that sell weapons

In the Markowitz framework, risk is defined as the: A)variance of returns. B)probability of a loss. C)beta of an investment.

variance of returns

When developing the strategic asset allocation in an IPS, the correlations of returns: A)among asset classes should be relatively high. B)within an asset class should be relatively high. C)within an asset class should be relatively low.

within an asset class should be relatively high

The correlation of returns on the risk-free asset with returns on a portfolio of risky assets is: A)negative. B)positive. C)zero.

zero