ch 13

A portfolio has a total return of 10.5%, a beta of 0.72 and a standard deviation of 6.3%. The risk free rate is 3.8%, the market return is 12.4%. Jensen's measure of this portfolio's performance is

A) 0.5%.

An investor in the 25% marginal tax bracket purchased a bond for $983, received $85 in interest, and then sold the bond for $955 after holding it for six months. The tax rate for capital gains with holding periods in excess of one year is 15%. What are the pre-tax and post-tax holding period returns?

A) 5.8%; 4.3%

The holding period return (HPR) of one's portfolio should be compared to investment goals I. to determine whether the rate of return is commensurate with the risk involved. II. to be sure one's portfolio is outperforming the S&P 500 Index. III. to isolate any problem investments. IV. to determine when to change benchmarks from the S&P 500 to the NASDAQ Composite Index.

A) I and III only

Which of the following are reasons to consider selling an investment that is currently in a portfolio? I. The investment has met the original objective. II. Better investment opportunities currently exist. III. The outlook for the investment has improved. IV. The investment has not met expectations and no change is expected.

A) I, II and IV only

Mathew's 401-K plan offers a choice between and S&P 500 Index Fund, a large-cap stock fund, a blue chip stock fund that seeks high dividend income and modest growth, a fund that invests only in investment grade corporate bonds and a fund that that invests only in government bonds. Mathew allocates 20% of his money to each fund. Which of the following statements offers the best critique of Mathew's "1/N" allocation?

A) Mathew may not be as well diversified as he thinks because the three stock funds probably own many of the same stocks.

Zachary holds 15 stocks in his portfolio. The portfolio's return last year was 11%, but one stock, RJH, doubled in value. What should Zachary do if he wants to be as diversified as he was at the beginning of the year?

A) Sell some of the RJH because it now constitutes a higher percentage of his holdings.

Which of the following is ideally suited to automatic investing through a payroll deduction plan?

A) a dollar cost averaging plan

Investors who who accept the random walk theory should use

A) a dollar cost averaging plan.

If a constant-dollar plan portfolio is profitable over the long run, the ________ in value over time.

A) conservative portion will increase

The S & P 500 Index is an appropriate benchmark for

A) diversified portfolios of large company stocks

For a stock investment, the dividend yield is calculated by

A) dividing a stock's annual cash dividend by its price.

The Sharpe's measure for Jane Smith's investment portfolio is 0.40, while the Sharpe's measure for the market is 0.30. This information suggests that Smith's portfolio

A) exhibits superior performance because its risk premium per unit of risk is above that of the market.

Treynor's measure of portfolio performance focuses on

A) nondiversifiable risk.

The process of selling certain issues in a portfolio and purchasing new ones to replace them is known as

A) portfolio revision.

The constant-ratio plan

A) requires the establishment of trigger points for portfolio rebalancing.

Asset allocation should focus on

A) the investor's financial and family situation.

An investor adopts a variable ratio policy of investing in both a high beta mutual fund and a money market fund. Money will be moved from the money market fund to the high beta fund

A) when the high beta fund's value has declined.

Dollar cost averaging is likely to work best with a mutual fund

A) whose NAV fluctuates widely, but trends upward.

Twelve months ago, Javier purchased a stock for $28 a share. The stock pays a quarterly dividend of $0.45 per share. Today, Javier sold the stock for $26.75 a share. What is his holding period return?

B) 1.96%

Ten years ago, Taylor purchased 444.44 shares in a mutual fund for $22.50 per share. He has never made an additional investment in this fund, but because of reinvested dividends and capital gains, he now owns 1,200 shares with a net asset value of $25.88 per share. Ignoring taxes, his compound average annual rate of return (IRR) is

B) 12%.

On February 19, 2016, Angela purchased 100 shares of BRD stock at a total cost of $3,425. She received a total of $250.00 in dividends and sold the stock today, February 22, 2017 for $3,692. Angela has a marginal tax rate of 28%. The tax rate on dividend income and long- term capital gains is 15%. What is Angela's after-tax holding period return on her investment in BRD stock?

B) 12.8%

Six months ago, Suzanne purchased a stock for $28 a share. Today she sold the stock at a price of $32 a share. During the time she owned the stock, she received a total of $1.30 in dividends per share. What is her holding period return?

B) 18.9%

On January 1, Stacy's portfolio was valued at $96,534. During the year Stacy received $3,285 in interest and $4,100 in dividends. She also sold one stock at a gain of $850. The value of the portfolio on December 31 of the same year was $113,201. At the end of June, Stacy withdrew $5,000 from the portfolio. What is the holding period return for the year?

B) 25.8%

Marti is 31 years old and is saving for retirement. Which one of the following portfolio allocations might best suit her situation if she is willing to accept a fair amount of risk in exchange for long-term capital appreciation?

B) 5% money funds, 10% bonds and 85% growth stocks

Phil has a portfolio with a 13.2% total return. The beta of the portfolio is 1.48 and the standard deviation is 13%. Currently, the risk-free rate of return is 4% and the overall market has a total return of 11%. What is the value of Treynor's measure for Phil's portfolio?

B) 6.2%

Allison's portfolio has an expected return of 14% and a beta of 1.37. Brianna's portfolio has an expected rate of return of 11% and a beta of 1. The risk-free rate is 3% and the expected rate of return on the market is 12%. According to the Jensen's measure,

B) Brianna has the better portfolio.

Allison's portfolio has an expected return of 14% and a standard deviation of 20%. Brianna's portfolio has an expected rate of return of 11% and a standard deviation of 12%. The risk-free rate is 3%. According to the Sharpe measure,

B) Brianna has the better portfolio.

Which one of the following statements concerning formula plans is correct?

B) Formula plans are based on the adherence to a mechanical set of rules with regard to whento buy and/or sell.

An asset allocation plan should consider which of the following investor characteristics? I. income and employment security II. marital status III. age and proximity to retirement IV. social relationships and peer groups

B) I, II and III only

Which of the following statements about Jensen's measure are correct? I. Through its use of the capital asset pricing model, Jensen's measure automatically adjusts for market return. II. In general, the higher the Jensen's measure, the better a portfolio has performed. III. Jensen's measure is referred to as alpha. IV. A positive Jensen's measure indicates an investment has underperformed the market on a risk-adjusted basis.

B) I, II and III only

If an investor's portfolio is comprised of a broad range of common stocks, the best measure to use as a basis of comparison of performance is the

B) S&P 500 index.

Which one of the following statements is correct if a portfolio has a Jensen measure of return of zero?

B) The portfolio earned exactly its expected return on a risk-adjusted basis.

Which one of the following provides the greatest reduction in total risk?

B) asset allocation

Jessica's portfolio consists of 30% common stock, 40% bonds, 15% foreign securities and 15% short-term securities. This asset allocation would be considered

B) moderate.

The fixed-weightings approach to asset allocation

B) requires periodic rebalancing of the portfolio to maintain the desired weights.

Tatiana is following a fixed weighting approach to managing her portfolio, which on January 1 consisted of 45% common stock, 40% bonds, and 15% short-term securities. Because stocks had a good year, at the end of the year, it consisted of 55% common stock, 35% bonds and 10% short-term securities. As a result,

B) she should sell stock and buy bonds and short-term securities to restore the original weightings.

Investors who wish to minimize the effect of taxes on their investment returns should try to avoid

B) short-term capital gains.

Sharpe's measure of portfolio performance compares the risk premium on a portfolio to

B) the portfolio's standard deviation of return.

The theory behind the variable ratio plan is to

B) time the cyclical movements of the stock market and thereby "buy low and sell high."

The general theory of dollar cost averaging is

B) to buy more stock when prices are low and less when prices are high.

Juan's investment portfolio was valued at $125,640 at the beginning of the year. During the year, Juan received $603 in interest income and $298 in dividend income. Juan also sold shares of stock and realized $1,459 in capital gains. Juan's portfolio is valued at $142,608 at the end of the year. All income and realized gains were reinvested. No funds were contributed or withdrawn during the year. What is the amount of income Juan must declare this year for income tax purposes?

C) $2,360

Ella's portfolio has a beta of 1.34 and a standard deviation of 16.4%. The portfolio has a total return of 14.8%. The market risk premium is 8.5%, while the return on the market portfolio was 12.0%. What is the value of Sharpe's measure for Ella's portfolio?

C) 0.69

Tim purchased a stock ten months ago for $14 a share, received a $1 dividend per share last month, and sold the stock today for $16 per share. Tim has a marginal tax rate of 30%. Both capital gains for securities held more than one year and dividend income is taxed at 15%. What is Tim's after-tax holding period return?

C) 16.1%

A portfolio has a total return of 14.5%, a beta of 1.54, and a standard deviation of 17.6%. If the risk free rate is 4.5% and the market return is 10.2%, then Treynor's measure of this portfolio's performance is

C) 6.5%

Maria purchased $5,000 of no-load mutual fund shares just over a year ago. She received $136 in dividend income and $201 in long-term capital gains distributions. Today she sold her shares for $5,062. Maria is in the 25% marginal tax bracket. Capital gains with holding periods in excess of one year and dividend income are taxed at 15%. What is Maria's after-tax holding period return?

C) 6.8%

A portfolio has a total return of 14.4%, a standard deviation of 18.5% and a beta of 1.43. The risk free rate is 2.5%, the market rate of return is 11.4%, and the market's Treynor measure is 6.3. What is the value of the Treynor measure of this portfolio?

C) 8.32%

Which of the following are required to measure the performance of a diversified stock portfolio? I. Price changes II. Dividend payments III. An appropriate index to use as a benchmark IV. The risk-free interest rate

C) I, II and III only

Dollar cost averaging is a procedure by which an investor

C) invests a fixed dollar amount in a security at fixed intervals.

Tactical asset allocation is most suitable for

C) large institutional investors.

Allison's portfolio has an expected return of 14% and a beta of 1.37. Brianna's portfolio has an expected rate of return of 11% and a beta of 1. The risk-free rate is 3%. According to the Treynor measure,

C) the portfolio's are equally desirable.

On January 1, Tim's portfolio was valued at $432,098. During the year Tim received $10,563 in interest and $15,060 in dividends. He also sold stock at a net loss of $12,870 and used the proceeds to purchase another stock. Tim did not contribute any more funds nor withdraw any funds during the year. On December 31 of the same year, Tim's portfolio was valued at $398,189. What is the holding period return for the year?

D) -1.9%

Which of the following is a "higher the better" measure? A) only Sharpe's measure B) only Treynor's measure C) only Jensen's measure D) All three are "higher the better" measures.

D) All three are "higher the better" measures.

An asset allocation plan should consider which of the following factors? I. economic outlook II. capital preservation III. changing investment goals IV. investor risk tolerance

D) I, II, III and IV

Indexes specifically for the performance of various types of mutual funds are published by

D) Lipper.

The best index to assess the performance of a portfolio diversified among several asset classes such as stocks, bonds and real estate is

D) No suitable index exists.

Which one of the following statements is correct concerning dollar cost averaging plans?

D) The goal of dollar cost averaging is long-term capital appreciation.

The holding period return (HPR)

D) can be used to determine the actual total return on stocks, bonds, and other investments for periods of one year or less.

The holding period return for mutual funds should be based on

D) capital gains distributions, dividends and change in net asset value.

The formula plan that requires maintaining a target dollar investment in the speculative portion of an investor's portfolio is the

D) constant dollar plan.

To compute the holding period return on a bond investment, the investor should divide the purchase price of the bond into

D) coupon payments received plus or minus any change in the bond's price.

Under the variable-ratio plan, additional speculative investments are made when the ratio

D) of the value of the speculative investments to the total portfolio value drops below a predetermined level.

The formula plan which requires the greatest management attention and is also the most aggressive is called the ________ plan.

D) variable ratio

6) Marianne is in the 30% marginal tax bracket. For her, a 5% return on a tax-exempt portfolio is equivalent to a 6.5% return on a taxable portfolio. T/F

False

A Jensen measure of 2.5% means that a security earned 2.5% more than the overall market. T/F

False

A rational investor will require the same return from a corporate security as from a government security. T/F

False

Asset allocation focuses on selecting specific securities within an asset class. T/F

False

Before analyzing needs and objectives, investors should first construct a portfolio. T/F

False

Changes in securities prices are not important when measuring portfolio performance unless gains or losses are realized. T/F

False

Investors who use formula plans believe that they have above average ability to time the market and pick successful investments. T/F

False

Most investment professionals consider the Dow Jones Industrial Average (DJIA) to be the most appropriate comparative gauge for evaluating the investment performance of a broadly based common stock portfolio. T/F

False

Only capital gains that have been realized should be included in the measurement of a portfolio's return over a given period of time. T/F

False

Several indexes are available to monitor the performance of stocks, but nothing similar is available for bonds or mutual funds. T/F

False

Sharpe's measure of portfolio performance adjusts for risk by dividing total portfolio return by the portfolio beta. T/F

False

The Dow Jones Industrial Average (DJIA) includes 500 of the largest companies traded onU. S. exchanges. T/F

False

The allocation of investments between types of assets (stocks, bonds, short-term securities, etc.) has less effect on a portfolio's return than the choice of securities within asset classes. T/F

False

The calculation of returns on options and futures must consider income as well as capital gains. T/F

False

The holding period return measures only the capital appreciation of an investment. T/F

False

Treynor's measure and Jensen's measure use the standard deviation of portfolio return in the denominator. T/F

False

When developing an asset allocation scheme, it is best to weight each type of asset equally. T/F

False

Dollar cost averaging is a formula plan to purchase the same number of shares of stock at regular intervals of time. T/F

Fasle

Formula plans are high-risk investment strategies that attempt to benefit from cyclical price movements. T/F

Fasle

Fixed weightings, flexible weightings, and tactical asset allocation are three approaches to asset allocation. Compare and contrast these three different approaches.

The fixed weightings approach assigns a fixed percentage of the portfolio to each asset category. This percentage is held constant over time. The flexible weightings approach assigns a percentage of a portfolio to each asset category but these weightings are changed periodically in response to changes in the overall market. Tactical asset allocation is a form of market timing that uses stock-index futures and bond futures to change a portfolio's asset allocation.

A conservative asset allocation would rely heavily on bonds and short-term securities. T/F

True

A constant ratio plan allows for speculative gains while limiting potential losses. T/F

True

A constant-ratio plan requires an investor to periodically rebalance the portfolio. T/F

True

Dollar cost averaging is a formula plan which automatically causes investors to purchase more shares when the price is low and purchase fewer shares when the price is high. T/F

True

Holding period return (HPR) captures total return performance by considering current income and capital gains and is most appropriate for holding periods of one year or less. T/F

True

Investors need to consider the effects of taxes and transaction fees when measuring portfolio returns. T/F

True

Investors need to monitor economic and market activity to assess the potential impact these factors can have on their investment portfolios. T/F

True

Jensen's measure of portfolio performance compares the return a portfolio to the beta adjusted market return. T/F

True

Jordan invests 10% of his money in each of the 10 mutual funds available in his 401-K plan. This tendency is known as the 1/N heuristic. T/F

True

Portfolio revision is the ongoing process of systematically studying the issues in the portfolio and selling certain issues and purchasing others as the means of maintaining a portfolio that best meets the investor's objectives. T/F

True

Returns for periods greater than one year should be measured using the internal rate of return. T/F

True

Sharpe measures total risk while Treynor and Jensen measure only systematic risk. T/F

True

Sharpe's measure is a measure of the risk premium per unit of total risk. T/F

True

Sharpe's measure of portfolio performance compares the risk premium on a portfolio to the portfolio's standard deviation of return. T/F

True

Successful portfolio management with a variable ratio plan depends on the investor's skill in timing the market. T/F

True

The investor's overall economic security should an important consideration when allocating assets within a portfolio. T/F

True

The key areas to monitor when evaluating your portfolio holdings are the overall performance of both the economy and the financial markets, and the returns on your investments. T/F

True

Utility stocks are often suitable for low-risk, current-income-oriented portfolios. T/F

True