Unit 20 - Portfolio Management Styles, Strategies, and Techniques

A portfolio manager who routinely shifts portfolio assets to take advantage of the business cycle is said to be engaging in A) rebalancing B) asset allocation C) sector rotation D) correlation

C) sector rotation

The capital asset pricing model (CAPM) is used by many to assess the expected return of a security. If the current risk-free rate is 2%, the current return on the market is 12%, and a particular stock's beta is 0.8 with a correlation coefficient of 0.60, the expected return would be A) 10.0% B) 9.6% C) 11.6% D) 7.2%

A) 10.0%

The current market interest rate for a bond rated AA with 20 years to maturity is 5%. In an efficient market, a similar bond with a coupon of 4% could be expected to have an internal rate of return of A) 5%. B) 4%. C) 6%. D) 8%

A) 5%. In an efficient market, bonds are priced so that their NPV is zero. That means the bond's yield to maturity is equal to the current market interest rates for similar bonds. When that rate is 5%, as is given in this question, all AA bonds with 20 years remaining to maturity should have a YTM of 5%.

Buying stocks with high P/E ratios normally reflects which of the following investment styles? A) Growth B) Special situations C) Turnaround D) Value

A) Growth

Two of the major factors involved in the capital asset pricing model (CAPM) are I. interest rates II. stock risk premium III. tax rates IV. market risk premium A) II and IV B) II and III C) I and III D) I and II

A) II and IV

An investment strategy where a higher price is paid for a stock based on expected returns is A) growth investing B) dollar cost averaging C) return on investment. D) futures investing

A) growth investing

The capital asset pricing model (CAPM) is an investment theory that serves as a model for A) pricing securities based on their systematic risk B) pricing securities based on their total risk C) measuring the correlation between a security and the overall market D) pricing securities based on their unsystematic risk

A) pricing securities based on their systematic risk Under the CAPM, securities are priced based on their systematic risk only, because this risk cannot be eliminated through diversification. The expected return of a security or portfolio is calculated by adding the rate on a risk-free security to a risk premium multiplied by the asset's systematic risk.

Based on the following information, which stock is most likely to appeal to a growth investor? A) P/E ratio of 8:1 B) Dividend yield of 0.3% C) Book value of $22 per share, current market value of $17 per share D) Dividend payout ratio of 65%

B) Dividend yield of 0.3% Growth investors usually seek stocks with high-growth expectations, reflected by a higher-than-normal P/E ratio, typically 20:1 or higher, and a low dividend yield, usually caused by a low dividend payout ratio. It would be unlikely to find a growth stock selling for close to its book value and certainly not below it.

In which of the following funds would a buy-and-hold style most likely be used by the manager? A) Options income fund B) Equity index fund C) Information technology fund D) Market timing fund

B) Equity index fund

Which of the following statements about diversification through asset class allocation are true? I. Diversification involves investing a portfolio in at least 20 different securities of the same asset class II. Diversification is a way to reduce unsystematic risk in a portfolio. III. Diversification is a defensive investment strategy. A) I and II B) II and III C) I and III D) I, II, and III

B) II and III

Emanuel owns 500 shares of IJKL common stock with a cost basis of $63 per share. IJKL is now priced at $82 and Emanuel is concerned that the stock may suffer a sharp decline in the near term. As his IAR, you would suggest his best move to protect his profit would be to A) sell 500 shares of IJKL short. B) buy 5 IJKL 80 put options. C) sell 5 IJKL 80 put options. D) buy 5 IJKL 80 call options.

B) buy 5 IJKL 80 put options.

Due to an escalating trade war, the portfolio manager of an equity mutual fund anticipates a negative impact on his fund's assets. To protect his investment portfolio, the fund manager would A) sell S&P 500 index puts B) buy S&P 500 index puts C) sell S&P 500 index calls D) buy S&P 500 index calls

B) buy S&P 500 index puts

Proponents of the efficient market hypothesis believe that A) active portfolio management will generally produce better results than passive management. B) markets operate efficiently and stock prices instantly reflect all available information. C) time horizon is one of the most important investment constraints. D) careful stock selection can produce positive alpha without increasing risk.

B) markets operate efficiently and stock prices instantly reflect all available information.

Under modern portfolio theory (MPT), the optimal portfolio has A) the most return for the most amount of risk B) the most return for a given amount of risk C) no risk for a given amount of return D) the least return for a given amount of risk

B) the most return for a given amount of risk

Your customer, age 29, is seeking a long-term growth investment, is concerned about the loss of purchasing power as a result of inflation, and often complains about high commissions that reduce his investment returns. When he was in college, he took a few economics courses and firmly believes that securities analysts cannot consistently outperform the overall market. Which of the following mutual funds is the most suitable for the customer? A) NC Growth & Income Fund B) ATF Biotechnology Fund C) ARG Stock Index Fund D) ZB Asset Allocation Fund

C) ARG Stock Index Fund The customer requires a mutual fund that offers potential for long-term capital growth. Because the client believes that money managers cannot outperform the market, an index fund, which simply mimics the market, is the appropriate investment. The client's complaint about high commission charges is a further argument for index funds, which have low expense ratios.

Which investment style does NOT take into consideration whether a specific security is under or overvalued? A) Growth B) Contrarian C) Indexing D) Active

C) Indexing

Which of the following is an example of dollar cost averaging? A) Buying shares of the KAPCO Growth Fund when the price is declining and selling shares when the price is rising B) Maintaining a constant dollar plan in the KAPCO Growth Fund C) Investing $200 into the KAPCO Growth Fund on the 15th of each month D) Purchasing 25 shares of the KAPCO Growth Fund on the 15th of each month

C) Investing $200 into the KAPCO Growth Fund on the 15th of each month

Which of the following is not a characteristic of a Monte Carlo simulation? A) The user gets a best-case scenario and a worst-case scenario. B) It provides insight into the range of outcomes. C) Large changes in the projected rate of return will make small differences in the outcome. D) It is a technique used to model uncertainty in retirement planning.

C) Large changes in the projected rate of return will make small differences in the outcome. Small changes in the projected rate of return will make large differences in the outcome.

An investor has opened an account with her IAR by making an initial deposit of $500,000. She agreed to have the account diversified among 4 asset classes as follows: 30% investment-grade corporate bonds 40% U.S. equities 20% cash equivalents 10% REITs She requests her portfolio to be rebalanced on a semiannual basis. If, 6 months after the initial deposit, the account values are: Bonds: $120,000 Equities: $210,000 Cash equivalents: $101,000 REITs: $69,000 it would be necessary to A) sell $19,000 of the REITs, $11,000 of the equities and use the proceeds to purchase $30,000 of bonds. B) sell $30,000 of the cash equivalents and use the proceeds to purchase $30,000 of bonds. C) sell $19,000 of the REITs, $1,000 of the cash equivalents, and $10,000 of the equities and use the proceeds to purchase $30,000 of bonds. D) sell $30,000 of the bonds and use the proceeds to buy $10,000 of the equities, $1,000 of the cash equivalents, and $19,000 of the REITs.

C) sell $19,000 of the REITs, $1,000 of the cash equivalents, and $10,000 of the equities and use the proceeds to purchase $30,000 of bonds.

An investor decides to make monthly investments into the KAPCO Growth Fund. Each month, the investor purchases 10 shares of the fund. Over a 4-month period, the investor accumulated 40 shares at the following prices: Month 1 - $10 Month 2 - $8 Month 3 - $12 Month 4 - $10 If, instead of purchasing 10 shares per month, the investor had invested $100 per month, A) the investor would have acquired 40 shares in either case. B) the investor would have paid slightly more in the second case. C) the investor would have acquired 40.833 shares instead of 40 shares. D) the investor's cost basis would be the same.

C) the investor would have acquired 40.833 shares instead of 40 shares.

Which of the following statements are generally TRUE of the buy-and-hold strategy? I. Equities would grow relative to fixed income II. Lower taxes and transactional costs III. Easy to manage IV. The portfolio would more accurately demonstrate the client's investment objectives and risk tolerance A) III and IV B) I and II C) II, III, and IV D) I, II, and III

D) I, II, and III

Due to an inheritance, one of your clients now owns a large position in LMN stock. She is concerned that the stock may decline in the upcoming months while she is deciding what to do with the investment. What type of investment strategy could she employ to protect the stock from substantial downside risk? A) Purchase call options on LMN stock B) Diversify into an index fund C) Write call options on LMN stock D) Purchase put options on LMN stock

D) Purchase put options on LMN stock

All of the following statements concerning capital market theory are correct EXCEPT A) the security market line (SML) depicts the tradeoff between risk and expected return for all assets, whether individual securities, inefficient portfolios, or efficient portfolios. B) the market risk premium is the difference between the expected return for the equities market and the risk-free rate of return. C) the security market line (SML) is the graphical depiction of the capital asset pricing model (CAPM). D) beta is a measure of volatility, or relative unsystematic risk, for stock or portfolio returns.

D) beta is a measure of volatility, or relative unsystematic risk, for stock or portfolio returns. Beta is a measure of relative systematic risk for stock or portfolio returns. A stock or portfolio with a beta of 1.0 would have the same systematic risk as the overall market.

In a financial market that is efficient, A) new information will be slowly reflected in securities prices. B) investors who do not believe in the efficient market hypothesis (EMH) will stop seeking undervalued securities. C) investors will take an active investment strategy if they are strong believers in the efficient market hypothesis (EMH). D) the prices of securities will not differ from their justified economic values for any length of time.

D) the prices of securities will not differ from their justified economic values for any length of time. An efficient market is a market that quickly reflects all new information. Accordingly, securities prices will not depart from their justified economic value for any extended period of time. Investors who are strong subscribers to the efficient market hypothesis (EMH) will be passive investors because they believe you just can't beat the market. On the other hand, investors who do not believe in the EMH will become active investors and will seek to identify undervalued securities.