Investments Exam 5

Rank these assets by liquidity, with 1 as most liquid and 5 as least liquid.

1. Cash 2. Commercial Paper 3. Bonds 4. Mortgages 5. Real Estate

Which of the following is widely accepted as the primary driver of portfolio returns?

A manager's allocation choices across different asset classes.

A client has a job as a tenured professor of finance at a successful university. Tenure implies that the professor can only lose the job in extreme cases of misconduct or closing of the program. In addition, this professor is in good health, has a healthy spouse, both of whom have life expectancies into their 90s, and expects to work another 15 years, but can work longer if retirement needs require it. The salary, although sufficient for a comfortable lifestyle, will not make the couple wealthy, in and of itself. What kind of investment portfolio is appropriate for this client?

A relatively aggressive, but balanced portfolio, heavily weighted in equities

Which investment policy is best suited to an investment firm that employs analysts with detailed knowledge of firms within a particular industry, but little expertise in macroeconomic analysis?

Active security selection with passive asset allocation

Which of the following statements is NOT true when it comes to the objectives of an individual investor?

As an investor draws near retirement age, they will take on a meaningful amount of portfolio risk to increase their expected rates of return.

Which of the following types of active portfolio management decisions can be modeled using style portfolios?

Asset allocation decisions

Which of the following are characteristics of liquidity?

Can be sold close to its value Can be sold quickly

An investor has an overweight investment in a long-term U.S. corporate bond fund, an underweight investment in a U.S. equity index fund, and an overweight short-term cash equivalents allocation. How would you categorize the investment policy for this investor?

Conservative with active allocation and passive security selection

Which of the following is essentially a savings account established by a firm for its employees?

Defined Contribution Plan

Which type of professional investor has an objective to deliver long-term flow of income that can meet short-term demands and faces no taxes and is lightly regulated

Endowment fund

Which of the following components of the investment process fleshes out details of optimal asset allocation and security selection?

Execution

True or false: Term insurance provides not only death benefits but a buildup of cash value in the policy as well.

False

True or false: Since institutional investment firms employ highly-trained and skilled investment professionals, most institutions will have similar investment outlooks and follow similar investment strategies.

False, the constraints and objectives for investment firms will guide their investment policies.

What is typically an individual's biggest asset?

His own human capital

Which of the following statements is NOT TRUE in regards to alpha and performance measures.

If a managed portfolio has a positive alpha, it has a higher Sharpe ratio than the market portfolio.

Which type of professional investor will have a long investment horizon, have little in liquidity needs, and varying investment objectives based on expected liabilities?

Life insurance companies

Passive strategies often outperform active strategies, particularly over the long run, due to which of the following?

Lower cost of analysis Lower trading costs Efficiency of the market

Which of the following types of investors have risk tolerance that tends to vary (through time or by management decision)I?

Mutual Funds Individuals

Which of the following are attributes of mutual funds?

Pools of Money Professionally Managed Possess Investment Objectives

Which of the following is NOT a part of an Investment Policy Statement?

Statement on capital market conditions and outlook

Which of the following is NOT a part of an Investment Policy Statement? 2

Statement on exchange rates and outlooks

How can changes in strategy affect the performance of a portfolio?

The change in strategy can increase the variance of the portfolio and provide a lower Sharpe Ratio. The change in strategy can decrease the variance of the portfolio and provide a higher Sharpe Ratio.

Which of the following statements does NOT describe a defined contribution?

The employer provides a specific annual retirement benefit.

Which of the following statements is NOT true about a personal trust?

The official name of the holder of the title of a trust is the Financial Manager.

True or false: Since an investor's investment is an asset, the investor may target the investment horizon to match the maturity of expected liabilities.

True (matching principle)

Another name for a benchmark is

a bogey

The continual updating and reevaluation of your portfolio over time is

a dynamic process

A whole-life insurance policy is one that combines a death benefit with a kind of savings plan that provides:

a gradual buildup of cash value

William Sharpe found that the performance of most mutual funds can be attributed to asset _______________ decisions across asset classes.

allocation

The Jensen measure is the ____________ of the investment.

alpha

The information ratio of a portfolio is defined as the ratio of its ______ to its residual standard deviation.

alpha

The information ratio of a portfolio is defined as the ratio of its ____________ to its residual standard deviation.

alpha

Survivorship bias implies

an upward bias in average fund performance

Top-down investment policies are commonly used because they

are consistent with capital market theory focus last on the least important investment decisions focus first on the most important investment decisions

The prudent investor rule requires professional and institutional investors to

assume a fiduciary responsibility in managing client assets

Extra return generated through market timing strategies should be

attributed to superior skill.

The simplest and most popular way to adjust returns for portfolio risk is to use _______. However, such rankings can be misleading when managers compared are not truly comparable and thus we need more precise risk adjustment.

comparison groups

Extra return generated through market timing strategies is not ___________ for risk.

compensation

Investment portfolios for which of these investors will likely have the longest investment horizon?

endowment funds

Information ratio is the most useful when we _______.

evaluate a portfolio to be mixed with the benchmark portfolio

Asset allocation decisions can be explained by regressing a fund's return on ________________ portfolios, the sum of the residuals in the regression can be attributed to security ______________ decisions.

factor or index, selection

True or false: Investment policies are primarily concerned with emphasizing the expertise of the investment professional.

false

True or false: The Sharpe ratio does recognize the shift in the mean resulting from an intra-year change in strategy

false

Rebalancing is an investing strategy that

fosters continual monitoring of the portfolio is a commonly used passive investment strategy encourages updating the portfolio holdings is part of a dynamic investment process

The prudent investor rule applies to

investing other people's money

When we compare a fund with its benchmark index, the interpretation becomes more intuitive if we use M2 rather than the Sharpe ratio because ______.

it shows the difference in return when portfolio variance is the same as market variance

When a market timer sells out of the risky portfolio and holds cash, the market timer's outlook for the risky portfolio is _________

pessimistic, weak, negative, bearish

Survivorship bias occurs when ________.

poorly performing funds are excluded from the sample

Market timing strategies _____.

rely on the manager's forecast of the relative performance between stocks and cash rely on shifting between investments in cash and a risky portfolio

When we rank many portfolios that will be mixed to form a well diversified fund of funds, we may find the Treynor measure better than the Sharpe ratio because ____________ in funds of funds.

residual risk can be easily diversified away

When we use the CAPM regression to evaluate the performance of a portfolio, the _________ of the regression represents the unsystematic risk of the portfolio.

residual standard deviation

The _________ __________ of a portfolio shows the incremental return an investor may expect for every increase of 1% standard deviation. It is the slope of the capital ____________ line supported by that portfolio.

sharpe ratio, allocation

Market timing strategies are similar to call options because the ______.

shift to cash represents a floor for the value of the portfolio while the risky portfolio has potential upside

The CFA Institute divides the process of investment management into elements that constitute a dynamic feedback loop. Which of the following is not part of the loop?

surveys

The Treynor measure is the ratio of excess return to ____________.

systematic risk (beta)

The most important portfolio decision is

the allocation between risky and risk-free assets

The difference between the Treynor measure of the portfolio and the Treynor measure of the market is

the alpha of the portfolio divided by its beta.

The approved list of assets in which a portfolio manager may invest is called

the asset universe.

The collection of funds to which performance is compared is called

the comparison universe.

When we use a single factor model to evaluate the performance of a fund, the x-variable of the regression is ______________.

the excess return on the market index

A benchmark or "bogey" represents ______.

the passive portfolio

The investment horizon is

the planned liquidation date of an investment.

Even if a fund manager invested in an undervalued security, he/she may still suffer loss if ____________.

the security price falls with the market

The holder of the title of a trust is called

the trustee

The Black-Scholes formula can be used to value the call option embedded in market timing.

true

True or false: As one ages and accumulates savings to provide for consumption during retirement, the composition of wealth shifts from human capital toward financial capital.

true

True or false: Mutual funds are firms that manage pools of individual investor money. They invest in accordance with their objectives and issue shares that entitle investors to a pro-rata portion of the income generated by the funds.

true