CFA_S12_MC
The minimum variance zero-beta portfolio most likely has some ______. A. systematic and unsystematic risk B. unsystematic risk and no systematic risk C. systematic risk and no unsystematic risk
B
The risk that hackers may break into a company's computer system and steal customer credit cards is a form of ______. A. business risk B. operational risk C. security risk
B
The x-axis for the CML is: A. Beta B. Standard Deviation
B
Because of interactions between risks, the total risk faced is LIKELY ______ the sum of the risks of the separate components. A. bigger than B. the same as C. smaller than
A
Investors who are less risk averse will have what type of utility curves? A) Flatter. B) Inverted. C) Steeper.
A
The measure of risk in an efficient frontier is ______. A. specific risk B. standard deviation of returns C. beta
B
A risk management committee should discuss key risk issues ______. A. at the management level B. at the board level C. among employees
A
A stock under the SML is: A. overpriced B. underpriced
A
All of the following affect an investor's risk tolerance EXCEPT: A) tax bracket. B) family situation. C) years of experience with investing in the markets.
A
An investor can liquidate his holdings in a closed-end fund by ______. A. selling his shares in the secondary market B. selling his shares back to the fund at the fund's net asset value C. selling his shares back to the fund after paying a redemption fee
A
Return generating models are used to estimate the ______ of a security. A. expected return B. beta (systematic risk) C. standard deviation (total risk)
A
The capital asset pricing model (CAPM) states that ______ A. the expected risk premium on an investment is proportional to its beta. B. the expected rate of return on an investment is proportional to its beta. C. the expected rate of return on an investment depends on the risk-free rate and the market rate of return.
A
The employees are the beneficiaries of a _ A. defined contribution trust B. defined benefit trust
A
The foundation for risk management is ______. A. risk governance B. risk infrastructure C. strategic risk integration
A
The key feature of market neutral hedge funds is ______ A. the low correlation between their returns and the traditional assets'. B. the take bet on the direction of a market. C. they buy stocks that they think will move up, and sell stocks that they think will move down.
A
The market portfolio of common stocks earned 20.4% last year. Treasury bills earned 5.3% on average last year. The average inflation rate was 2.5%. What was the real risk premium on equities? A. 15.1% B. 22.9% C. 12.6%
A
The portion of the risk that can be eliminated by diversification is called ______. A. unique risk B. market risk C. default risk
A
The x-axis for the SML is: A. Beta B. Standard Deviation
A
What are the main criteria to consider in the policy statement with regard to asset allocation? I. What asset classes to consider for investment II. What normal policy weights to assign to each eligible asset class III. The allowable allocation ranges based on policy weights A. I and II B. I and III C. I, II and III
A
When individuals evaluate their portfolios they should evaluate ______. A. all assets and liabilities B. all marketable securities and other liquid assets C. all marketable securities
A
In Fama and French's multifactor model, the expected return on a stock is explained by: A) firm size, book-to-market ratio, and price momentum. B) firm size, book-to-market ratio, and excess return on the market portfolio. C) excess return on the market portfolio, book-to-market ratio, and price momentum.
B
When the market is in equilibrium: A) all assets plot on the CML. B) all assets plot on the SML. C) investors own 100% of the market portfolio.
B
Which element of the risk management framework allows an assessment of an organization's risk profile? A. Risk identification and measurement B. Risk infrastructure C. Risk monitoring, mitigation and management
B
Which measure gives investors rankings that are identical to those of the Sharpe ratio? A. Treynor ratio B. M-square C. Jensen Alpha
B
Which of the following is an investment objective? A) Liquidity needs. B) Risk tolerance. C) Tax concerns. D) Time Horizon E) Legal Concerns F) Regulatory Concerns
B
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. D) Time Horizon E) Legal Concerns F) Regulatory Concerns
B
Which of the following statements about the importance of risk and return in the investment objective is least accurate? A) The return objective may be stated in dollar amounts even if the risk objective is stated in percentages. B) Expressing investment goals in terms of risk is more appropriate than expressing goals in terms of return. C) The investor's risk tolerance is likely to determine what level of return will be feasible.
B
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.
B
Which statement is true? A. The principles underlying portfolio risk management are generally not applicable to the risk management of non-financial institutions. B. Risk identification and measurement includes the qualitative assessment of all potential sources of risk. C. Risk management is not an offensive weapon because management should try to avoid risks instead of undertaking risks.
B
The market portfolio of common stocks earned 20.4% last year. Treasury bills earned 5.3% on average last year. The average inflation rate was 2.5%. What was the real return on equities? A. 12.6% B. 15.1% C. 17.9%
C
A Value at Risk statistic has these components: ______. I. the amount of potential minimum loss II. the amount of potential maximum loss III. the probability of that amount of loss IV. the time frame A. I and III B. II, III and IV C. I, III and IV
C
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) liquidity. B) unique circumstances. C) legal and regulatory.
C
The ratio of a portfolio's standard deviation of return to the average standard deviation of the securities in the portfolio is known as the: A) Sharpe ratio. B) relative risk ratio. C) diversification ratio.
C
Sharpe ratio is the slope of the ______. A. security market line B. characteristic line C. efficient frontier D. capital allocation line
D
The SML relates ______. A. expected return to standard deviation B. expected return of securities to expected return of portfolios C. efficient sets of portfolios to the risk-free rate D. expected return to beta E. standard deviation to risk
D
A stock over the SML is: A. overpriced B. underpriced
B
A client's ability to take risk is mainly determined by these factors: I. Investment time horizon II. Psychological factors III. Level of financial knowledge A. I, II, III B. I C. I, III
B
A steeper security characteristic line indicates ______. A. a stronger relationship between the security and the market B. a higher level of systematic risk for the security C. a higher level of systematic risk for the market D. a higher variance of the security
B
A stock that plots below the Security Market Line most likely: A) has a beta less than one. B) is overvalued. C) is below the efficient frontier.
B
A stock with a beta of 1.5 should have a ______ required rate of return than the market, and a ______ required rate of return than a stock with a beta of 2. A. lower; lower B. higher; lower C. lower; higher
B
According to the Capital Asset Pricing Model (CAPM) if investors borrow at a rate that exceeds the risk-free lending rate the resulting borrowing portfolios will ______ A. plot on a steeper line. B. plot on a flatter line. C. no longer plot on a straight line.
B
All portfolios on the capital market line are: A) unrelated except that they all contain the risk-free asset. B) perfectly positively correlated. C) distinct from each other.
B
An investment's return on investment usually has two components, one of which is ______ which reflects the cash you receive directly while you own the investment. A. the capital gain B. the income component C. your reward for bearing risk D. your total dollar return E. your gross return on that investment
B
Beta is the slope of the ______. A. security market line B. characteristic line C. efficient frontier D. capital allocation line
B
For defined benefit pension plans, the risk tolerance is typically ______ and the liquidity needs are typically ______. A. low; low B. high; low C. high; high
B
If E(r)[given] is greater than E(r)[CAPM], security is A. overpriced B. underpriced
B
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 the asset's expected volatility changes. This depends on each asset's standard deviation. B) The frontier extends to the left, or northwest quadrant representing a reduction in risk while maintaining or enhancing portfolio returns. C) 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
In the risk management framework, the management is responsible for ______. A. risk budgeting B. planning value-maximizing strategies C. risk tolerance
B
The Capital Asset Pricing Model (CAPM) is best described as ______. A. the simple relationship between risk and return B. the theoretical relationship between systematic risk and expected return C. the graphical depiction of the risk/return relationship
B
The assumptions of capital market theory expand on those of the ______ portfolio model and include consideration of the ______ rate of return. A. efficient market; risk-free B. Markowitz; risk-free C. efficient market; above average
B
The indifference curve for risk-seeking investors runs ______. A. from southwest to northeast B. from northwest to southeast C. from west to east (a horizontal line)
B
The major difference between an index mutual fund and an ETF is that ______ A. ETF investors buy fund shares directly from the ETF fund. B. ETF investors can purchase shares on margin. C. ETFs often reinvest the dividends.
B
The market risk premium is ______. A. the difference between the rate of return on an asset and the risk-free rate B. the difference between the rate of return on the market portfolio and the risk-free rate C. the market rate of return
B
In the presence of a risk-free security, the efficient frontier ______ A. consisting of risky assets moves down parallel to itself. B. consisting of risky assets moves up parallel to itself. C. changes and is replaced by a straight line.
C
On June 26, 1974, the license of a German bank (Herstatt) was withdrawn by German regulators at the end of the banking day (4:30pm local time) because of a lack of income and capital to cover liabilities that were due. Some banks had undertaken foreign exchange transactions with Herstatt and had already paid Deutsche marks to the bank during the day, believing they would receive U.S. dollars later the same day in the U.S. from Herstatt's U.S. nostro. But after 3:30 pm in Germany and 10:30 am in New York, Herstatt stopped all dollar payments to counterparties, leaving the counterparties unable to collect their payments. Risk like this is referred to as ______. A. credit risk B. liquidity risk C. settlement risk
C
Paired correlations of assets should be relatively ______ within an asset class, and relatively ______ versus assets in other asset classes. A. low, low B. low, high C. high, low
C
Researchers were able to develop the CAPM by adding what variable to the efficient frontier? A. Return on the market B. Measure of risk C. Risk-free rate D. Beta
C
Standard deviation is a measure of ______. A. systematic risk B. unsystematic risk C. total risk D. diversifiable risk
C
Stock A has a standard deviation of 16% and a beta of 1.1. T-bills are currently yielding 3.7% on an annualized basis. The expected return on the market index is 9.1% while its standard deviation is 14.9%. If Stock B is expected to earn 10.51% and it is of equal risk to Stock A, which of the following statements would be the most accurate? A. Since Stock A has an expected return of 9.64%, it must be underpriced. B. Since Stock A has an expected return of 11.41%, it must be underpriced. C. Since Stock A has an expected return of 9.64%, it must be overpriced.
C
The bulk of hedging is represented by ______. A. risk avoidance B. risk transfer C. risk shifting
C
The optimal portfolio includes all of the following characteristics except which of the following? A. The optimal portfolio lies at the point of tangency between the efficient frontier and the highest possible utility curve. B. The optimal portfolio may be different for each investor, but for a given investor it has the highest utility. C. Utility curves may be different for individual investors even though the optimal portfolio for each investor is presumed to be the same.
C
The risk management committee can ______ A. approve the governing body's policies. B. establish a firm's risk tolerance. C. discuss key risk management issues.
C
The security characteristic line is ______ A. used to derive the total risk of an asset. B. the SML. C. used to derive the systematic risk of an asset. D. the typical Markowitz efficient frontier.
C
The sensitivity of a call option's price to a small change in the volatility of the underlying asset is called the ______. A. delta B. gamma C. vega
C
The slope of the capital market line (CML) is a measure of the level of: A) expected return over the level of inflation. B) risk over the level of excess return. C) excess return per unit of risk.
C
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.
C
Which institutional investor has the longest investment time horizon? A. A defined benefit pension plan that is closed to new members B. A property insurance company C. Stanford University Endowment Fund
C
Which is the best measure to capture the systematic risk of a portfolio? A. Probability B. Standard deviation C. Beta
C
Which of the following is NOT evidence of the fact that investors are risk-averse? I. Investors purchase various types of insurance. II. The difference in the promised yield for different grades of bonds that supposedly have different grades of credit risk. A. I only B. II only C. Both are evidences of risk aversion.
C
If a risk is considered to offer few rewards and lies outside the core competences of a company, the company should likely try ______ first. A. risk prevention and avoidance B. risk transfer C. risk shifting
A
Risk tolerance should be determined at the ______ level. A. management B. board C. day-to-day operation
B
An investor's utility curves will be very ______ if they are very risk-averse, indicating they will not tolerate much additional risk to obtain additional returns. A. steep B. flat C. curvilinear D. curved E. convex
A
An organization is investigating what shortfalls within the organization would cause it to fail to achieve some critical goals. This step is usually done at the ______ stage. A. risk tolerance B. risk budgeting C. risk measurement
A
Beta can be viewed as ______. A. covariance of an asset with the market portfolio B. correlation coefficient with the market portfolio C. a measure of unsystematic risk
A
Factors that should be used to determine an organization's risk tolerance include ______. A. competitors' pricing strategies B. agendas of board members C. short-term pressure from bondholders
A
If E(r)[given] is less than E(r)[CAPM], security is A. overpriced B. underpriced
A
Investors seeking the highest possible return-to-risk tradeoff ______ A. will hold the lowest risk portfolio possible. B. will hold the efficient portfolio with the highest return. C. will hold the efficient portfolio with the lowest return.
A
Market Risk Premium is the slope of the ______. A. security market line B. characteristic line C. efficient frontier D. capital allocation line
A
Which of the following statements about the steps in the portfolio management process is NOT correct? A) Developing an investment strategy is based on an analysis of historical performance in financial markets and economic conditions. B) Rebalancing the investor's portfolio is done on an as-needed basis, and should be reviewed on a regular schedule. C) Implementing the plan is based on an analysis of the current and future forecast of financial and economic conditions.
A
Which of the following statements is (are) true with respect to setting the proper constraints in managing a portfolio? I. The more certain an investor's financial future, the less liquidity will be in the portfolio, holding everything else constant. II. The longer the investment horizon, the more emphasis must be placed on any current expectations with regards to the relative performance of the various asset classes. III. Low levels of sophistication are an indication that an investor is inexperienced and hence the manager should overestimate the investor's level of risk tolerance. A. I B. III C. II, III
A
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.
A
You invest $100 in a risky asset with an expected rate of return of 12% and a standard deviation of 15% and a T-bill with a rate of return of 5%. The slope of the Capital Allocation Line formed with the risky asset and the risk-free asset is equal to ______. A. 0.4667 B. 0.8000 C. 2.14
A
Consider a forward contract with a gold producer in which the bank pays the spot price of gold and receives a fixed price. Suppose the price of gold were to decrease. That would worsen the credit quality of the gold producer, since its revenues would decrease, making its business less profitable and viable. It would also increase the value of the forward contract to the bank, since the bank is paying the spot price; therefore, the bank's exposure would increase. The risk the bank faces is often referred to as the ______. A. credit risk B. counterparty risk C. wrong-way risk
C
ETFs are created by ______. A. institutional investors B. public investors C. fund sponsors
C
For T-bills (no risks), the risk aversion coefficient ______ A. is always 0. B. is always positive. C. can be positive, 0, or negative.
C
Given an optimal risky portfolio with expected return of 14% and standard deviation of 22% and a risk-free rate of 6%, what is the slope of the best feasible CAL? A. 0.64 B. 0.33 C. 0.36
C
If a stock is over priced it would plot ______. A. above the security market line B. on the security market line C. below the security market line
C
A portfolio to the right of the market portfolio on the capital market line (CML) is created by: A) holding both the risk-free asset and the market portfolio. B) fully diversifying. C) holding more than 100% of the risky asset.
C
A security characteristic line is ______ A. the security market line when expressed in terms of required return and standard deviation of a security or a portfolio. B. a graph between the required return on a security and its systematic risk. C. the regression line between the excess return on a security and the excess return on the market portfolio.
C
Assumptions of the Markowitz model include which of the following? A. Investors estimate portfolio risk using beta. B. Investors base decisions solely on historical return and systematic risk. C. Investors seek to maximize one-period expected utility.
C
Compared to the traditional Capital Asset Pricing Model (CAPM), where lending and borrowing are carried out at the risk-free rate, a zero-beta CAPM would most likely result in a security market line (SML) with ______. A. unchanged intercept and slope B. a lower intercept and steeper slope C. a higher intercept and flatter slope
C
Which of the following is least likely considered a source of systematic risk for bonds? A) Purchasing power risk. B) Market risk. C) Default risk.
C
Which of the following risks CANNOT be referred to as a compliance risk? A. Accounting risk B. Tax risk C. Legal risk
C
Which of the following statements about investment constraints is least accurate? A) Diversification efforts can increase tax liability. B) Unwillingness to invest in gambling stocks is a constraint. C) Investors concerned about time horizon are not likely to worry about liquidity.
C
Which of the following statements about the capital market line (CML) is least accurate? A) Investors choose a portfolio on the CML by varying their weightings of the risk-free asset and the market portfolio. B) The CML will not be a linear relationship if investors' borrowing and lending rates are not equal. C) The market portfolio lies on the CML and has only unsystematic risk.
C
Which of the following statements concerning the Security Market Line (SML) is incorrect? A. A movement along the SML is caused by a change in the risk characteristics of an investment. B. A change in the market risk premium implies a change in the slope of the security market line. C. A shift in the security market line will affect only an individual security.
C
Which of the following statements reflects the importance of the asset allocation decision to the investment process? The asset allocation decision ______ A. helps the investor decide on realistic investment goals. B. identifies the specific securities to include in a portfolio. C. determines most of the portfolio's returns and volatility over time. D. creates a standard by which to establish an appropriate investment time horizon.
C
Which of the following statements regarding individual and institutional investors is (are) incorrect? I. Individuals define risk as "losing money", while institutions view risk as variance (or standard deviation) of returns. II. Individuals are categorized according to their personalities and unique circumstances, whereas institutions are categorized by the investment characteristics of those that have a beneficial interest in the portfolios of pension funds, endowment funds, banks, insurance companies and mutual funds. III. Individuals are defined financially by their assets and goals (particularly as they related to their life cycle), while institutions are typically concentrated within precise asset and liability parameters. IV. Institutions have great flexibility in selecting their investments, whereas individuals are managed and regulated by ERISA (Employee Retirement Income Security Act) as well as other legal constraints. A. II and IV B. I and III C. IV only
C
Which risk is sometimes called Herstatt risk? A. Credit risk B. Liquidity risk C. Settlement risk
C
Which statement regarding the Treynor ratio is false? A. It cannot be applied to assets with negative beta. B. Portfolios with identical systematic risk but different total risk will be rated the same using Treynor ratio. C. A portfolio with a Treynor ratio of 0.1 is 2 times better than a portfolio with a Treynor ratio of 0.05.
C
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?"
C
The employer is the beneficiary of a _ A. defined contribution trust B. defined benefit trust
b
