Investment Portfolio Analysis
Which factors indicate that in-depth credit analysis of high-yield bonds is important? -the large number of high-yield issues -the overall decline in quality of these bonds -the wide range of quality among these bonds -the growing complexity of these bonds -All of these are correct.
ALL are correct
The _____ refers to firms that actually invest in securities. buy-side sell-side SEC issuing firm investment bank
BUY-SIDE
An investment bank can do an IPO offering as a: -discounted commitment. -best efforts commitment. -premium commitment. -best efforts offering. -red herring.
Best efforts offering
Consider a bond portfolio manager who expects interest rates to decline and must choose between the following two bonds. Bond A: 10 years to maturity, 5 percent coupon, 5 percent yield to maturity Bond B: 10 years to maturity, 3 percent coupon, 4 percent yield to maturity -Bond A because it has a higher coupon rate -Bond A because it has a higher yield to maturity -Bond B because it has a lower coupon rate -Bond A or Bond B because the maturities are the same -None of these are correct.
Bond B because it has a lower coupon rate
_____ is the description of how management uses resources to create value on behalf of shareholders. Corporate governance Capital allocation Executive compensation Going public A stock pitch
CAPITAL ALLOCATION
A defensive company is one whose sales, earnings, and cash flows are strongly correlated with the business cycle.
FALSE
A growth company is one whose stock is undervalued by the market.
FALSE
A negative Treynor measure (negative T) for a portfolio always indicates that the portfolio would plot below the SML.
FALSE
A successful offering is undersubscribed.
FALSE
According to the expectations hypothesis, a rising yield curve indicates that investors' demand for long maturity bonds is expected to rise.
FALSE
Altman-Nammacher (1987) created a modified Z-score model using a multiple regression analysis technique.
FALSE
An analysis of U.S. equity markets using the cash flow techniques concludes that the market is not fully valued.
FALSE
An increase in the required rate of return k will increase the P/E ratio.
FALSE
Being a public company also has some advantages, among which management must answer to outside shareholders.
FALSE
Bond price volatility varies directly with the term to maturity and directly with the coupon.
FALSE
Buy-side analysts typically cover the stocks within a particular industry and produce reports that are intended to help the sell-side reach investment decisions.
FALSE
General obligation bonds (GOs) are serviced by the income generated from specific revenue-producing projects of the municipality.
FALSE
If an investor buys a high coupon bond, and rates then fall, the investor has "locked up" that high yield as a realized yield.
FALSE
In most countries, sovereign bond issues are the smallest bond market segment.
FALSE
Operating free cash flow and free cash flow to equity are equivalent cash flow concepts.
FALSE
Over the last 20 years, increases in the return on equity for the S&P Index have been associated with decreases in return of assets.
FALSE
Stock prices move coincidentally with the economy.
FALSE
The Sharpe and Treynor measures always give different rankings.
FALSE
The Sharpe measure examines the risk premium per unit of systematic risk.
FALSE
The Sortino ratio takes into account the downside risk exposure in the portfolio.
FALSE
The cyclical indicator approach to market analysis is based on the belief that the economy expands and contracts in a random manner.
FALSE
The ex-dividend date is the date on which the transfer agent "closes the book" and looks at who is the shareholder.
FALSE
The market rewards investors for bearing total risk.
FALSE
The three major theories explaining the term structure of interest rates are the expectations hypothesis, the liquidity differential hypothesis, and the segmented quality hypothesis.
FALSE
The typical proxy for the market portfolio is the S&P 500 Index because it is diversified and price weighted.
FALSE
Two desirable attributes of a portfolio manager's performance are the ability to derive above-average returns for a given risk class and the ability to time the market.
FALSE
Underpriced stocks can be ranked using the excess return ratio, which is calculated as the Market price/Risk free rate.
FALSE
The overallotment option gives the investment bank the right to buy _____ more shares within the next _____.
15 % , 30 Days
The institutions that invest most heavily in corporate bond issues are: -life insurance companies and commercial banks. -life insurance companies and property and liability insurance companies. -life insurance companies and pension funds. -commercial banks and property and liability insurance companies. -commercial banks and pension funds.
Life insurance companies and pension funds.
The _____ refers to firms that facilitate securities transactions. -buy-side -sell-side -SEC -issuing firm -pension fund
SELL-SIDE
The goal of _____ is to convince an investor to buy a stock or to sell a stock short. corporate governance capital allocation executive compensation going public the stock pitch
THE STOCK PITCH
A bond portfolio is immunized from interest rate risk if the modified duration of the portfolio is always equal to the desired investment horizon.
TRUE
A company goes public for many reasons, including that the original investors and the management team would like liquidity.
TRUE
A manager following an interest rate anticipation strategy would shorten portfolio duration if interest rates were expected to increase.
TRUE
A peer group comparison collects the returns produced by a representative universe of investors over a specific period of time and displays them in a simple boxplot format.
TRUE
A stock with low systematic risk is considered to be a defensive stock.
TRUE
As the market's return on equity increases so will the P/E ratio.
TRUE
Attribution analysis separates a portfolio manager's performance into an allocation effect and selection effect.
TRUE
CEO compensation is often used to try to remedy the principal-agent conflict.
TRUE
Contingent immunization is a strategy that allows the bond manager flexibility to actively manage the portfolio subject to an overriding constraint that the portfolio remains immunized at some predetermined yield level.
TRUE
Earnings growth and dividend yield will be impacted by GDP growth.
TRUE
For a bond, the present value model incorporates both the coupon receipts and the capital gain or loss.
TRUE
In a buy-and-hold strategy, bonds are purchased in light of the investor's objectives and constraints and then held until maturity.
TRUE
In a ladder strategy, funds are invested equally among a wide range of maturities.
TRUE
Instruments for intermediate-term issues with maturities in excess of one year but less than 10 years are known as notes
TRUE
Investors want directors who will voice their opinion, who are not beholden to the CEO or board chair, and who have enough experience that their opinion carries weight on the board.
TRUE
Investors want their portfolio managers to completely diversify their portfolio, that is, eliminate all systematic risk.
TRUE
Kaplan (2013) argues that the market for top executives is competitive, and compensation of other professionals is growing even faster.
TRUE
One example of a flawed benchmark is using the median manager from a broad universe in a peer group comparison.
TRUE
Public bonds differ from other debt because they are sold to the public rather than to a single investor.
TRUE
Recent studies indicate that one can earn excess returns in the stock market by forecasting unanticipated changes in the money supply.
TRUE
Recent studies show that money supply changes have an important impact on stock price movements.
TRUE
Returns from the overall market (or an individual stock) can be thought of as a combination of three factors: earnings growth, multiple expansion (or contraction), and dividend yield.
TRUE
Sharpe's performance assumes that all portfolios are completely diversified.
TRUE
The University of Michigan Consumer Sentiment Index is an example of a leading indicator.
TRUE
The advantage of evaluating a fund's alpha using a multifactor approach is that it is designed to control for market style (SMB and HML) and momentum (MOM) risk.
TRUE
The authors of the text prefer forward valuation ratios as opposed to historical valuation variables in relative valuation methods.
TRUE
The breakeven yield is the same as the implied forward rate.
TRUE
The declaration date is the date that a dividend is announced by the board of directors.
TRUE
The investment style of a bond portfolio can be summarized by its two most important characteristics: credit quality and interest rate sensitivity.
TRUE
The longer the time to maturity, the greater the percentage change in a bond's price.
TRUE
The market for short-term issues with maturities of one year or less is commonly known as the money market.
TRUE
The most common manner of evaluating portfolio managers is a peer group comparison.
TRUE
The ranking differences between the Sharpe, Treynor, and Jensen performance measures occur because of the differences in diversification.
TRUE
The sell-side refers to firms that facilitate securities transactions.
TRUE
The two main questions when assessing the performance of an investment manager are: how did the portfolio manager actually perform, and, why did the portfolio manager perform as he or she did?
TRUE
Treasury Inflation-Protected Securities (TIPS) are inflation-indexed bonds in which the bond principal and interest payments are indexed to the consumer price index.
TRUE
When applying active management techniques to a global portfolio, the additional concern is an expectation regarding exchange rates between countries.
TRUE
A stock pitch includes all of the following EXCEPT: -That stock returns are mean reverting. -merits of a stock. -models and multiples. -risks. -background information about the company.
That stock returns are mean reverting.
Collateralized mortgage obligations (CMOs) offset some of the problems associated with traditional mortgage pass-throughs because: -they are overcollateralized. -they have variable rates. -they are collateralized by auto-loans. -they are deep discount instruments. -they are collateralized by credit card debt.
They are overcollateralized
Which set of conditions will result in a bond with the greatest volatility? -a high coupon and a short maturity -a high coupon and a long maturity -a low coupon and a short maturity -a low coupon and a long maturity -a deferred call feature and a sinking fund
a low coupon and a long maturity
Under the performance attribution analysis method, the ____ measures the manager's decision to over- or underweight a particular market segment in terms of that segment's return performance relative to the overall return to the benchmark. -selection effect -allocation effect -distribution effect -diversification effect -attribution effect
allocation effect
Horizon matching is a combination of: -cash-matching dedication and interest rates swaps. -cash-matching dedication and immunization. -interest rate swaps and immunization. -enhanced indexing and immunization. -enhanced indexing and interest rate swaps.
cash-matching dedication and immunization.
The two questions when assessing the performance measurement of an investment manager include: -did the manager follow the client's policy statement? -did the manager completely diversify the portfolio to eliminate all unsystematic risk? -why did the portfolio manager perform as he or she did? -did the manager have the ability to derive above-average risk adjusted returns? -did the manager deliver on expectations and produce an additional alpha component?
did the manager have the ability to derive above-average risk adjusted returns?
Returns from the overall market (or an individual stock) can be thought of as a combination of which of the following factors? -earnings growth, multiple expansion, and dividend yield -earnings growth, multiple expansion, and annualized return -earnings growth, interest rates, and dividend yield -inflation, multiple contraction, and dividend yield -inflation, contraction, and annualized return
earnings growth, multiple expansion, and dividend yield
Treynor showed that rational, risk-averse investors always prefer portfolio possibility lines that have -zero slopes. -slightly negative slopes. -highly negative slopes. -highly positive slopes. -highly positive slopes.
highly positive slopes.
The option adjusted duration will approach the duration to maturity, when: -interest rates are significantly above the coupon rate because the option has very little chance of being called, and the call option will have very little value. -interest rates are significantly below the coupon rate because the option has very little chance of being called, and the call option will have very little value. -interest rates are significantly above the coupon rate because the option has a high chance of being called, and the call option will have significant value. -interest rates are significantly below the coupon rate because the option has a high chance of being called, and the call option will have significant value. -None of these are correct.
interest rates are significantly above the coupon rate because the option has very little chance of being called, and the call option will have very little value.
According to the liquidity preference hypothesis, yield curves generally slope upward because: -investors prefer short maturity obligations to long maturity obligations. -investors prefer long maturity obligations to short maturity obligations. -investors prefer less volatile long maturity obligations. -investors prefer more volatile short maturity obligations. -None of these are correct.
investors prefer short maturity obligations to long maturity obligations.
The Sortino measure differs from the Sharpe ratio in that: -it measures the portfolio's average return in excess of a user-selected minimum acceptable return threshold. -it measures the portfolio beta. -higher values of the Sortino measure are not desirable, while higher values in the Sharpe ratio are desirable. -it measures standard deviation of total portfolio return. -it measures portfolio beta relative to the market index proxy
it measures the portfolio's average return in excess of a user-selected minimum acceptable return threshold.
The term dedication, used to describe portfolio management techniques, is referring to servicing a prescribed set of: -interest payments. -assets. -liabilities. -pensioners. -sinking fund payments.
liabilities.
For a bond investor selecting a buy-and-hold strategy, which of the following would be the least important consideration? -term to maturity -indenture provisions -Coupon levels -liquidity -quality
liquidity
When homeowners pay off mortgages when they sell their homes, or when homeowners refinance home mortgages, they effectively: -make the maturities of GNMA securities longer. -make the maturities of GNMA securities shorter. -make the maturities of U.S. Treasury securities longer. -make the maturities of U.S. Treasury securities shorter. -default on their mortgages.
make the maturities of GNMA securities shorter.
In the Characteristic Selectivity (CS) performance measure: -portfolio performance is measured by assessing the quality of services provided by money managers by looking at adjustments made to the content of their portfolios. -portfolio performance is measured by examining both unsystematic and systematic risk. -portfolio performance is measured by comparing the returns of each stock in the -portfolio to the return of a benchmark portfolio. -portfolio performance is measured on the basis of return per unit of risk. -portfolio performance is measured on the basis of historic average differential return per unit of historic variability of differential return.
portfolio performance is measured by comparing the returns of each stock in the portfolio to the return of a benchmark portfolio.
Under the performance attribution analysis method, the ____ measures the manager's ability to form specific market segment portfolios that generate superior returns relative to the way in which the comparable market segment is defined in the benchmark portfolio weighted by the manager's actual market segment investment proportions. -selection effect -allocation effect -distribution effect -diversification effect -attribution effect
selection effect
If you expected interest rates to rise, you would prefer to own bonds with: -short maturities and low coupons. -long maturities and high coupons. -long maturities and low coupons. -short maturities and high coupons. -None of these are correct.
short maturities and high coupons.
A graph of a bond's Price-Yield curve reveals all of the following EXCEPT: -price moves inverse to yield. the bond sells at a premium when the yield is below the coupon rate. -the bond sells at a discount when the yield is above the coupon rate. -the Price-Yield curve is concave. -All of these are correct.
the Price-Yield curve is concave.
For a poorly diversified portfolio the appropriate measure of portfolio performance would be: -the Treynor measure because it evaluates portfolio performance on the basis of return and diversification. -the Sharpe measure because it evaluates portfolio performance on the basis of return and diversification. -the Treynor measure because it uses standard deviation as the risk measure. -the Sharpe measure because it uses beta as the risk measure. -The Jensen measure because it measures the risk-adjusted performance.
the Sharpe measure because it evaluates portfolio performance on the basis of return and diversification.
In the evaluation of bond portfolio performance, the policy effect refers to: -the difference in portfolio duration and index duration. -the extra return attributable to acquiring bonds that are temporarily mispriced relative to risk. -short-run changes in the portfolio during a specific period. -the differential return from changing duration of the portfolio during a specific period. -None of these are correct.
the difference in portfolio duration and index duration.
Global Investment Performance Standards (GIPS), were intended to accomplish which of the following goals? -to assess the quality of services provided by money managers by looking at adjustments made to the content of their portfolios -to measure both unsystematic and systematic risk -to establish investment industry best practices for calculating and presenting investment performance that promote investor interests and instill investor confidence -to measure portfolio performance on the basis of return per unit of risk -to measure portfolio performance on the basis of historic average differential return per unit of historic variability of differential return
to establish investment industry best practices for calculating and presenting investment performance that promote investor interests and instill investor confidence
