FIN 477

1. The basic trade-off in the investment process is a. between the anticipated rate of return for a given investment instrument and its degree of risk. b. between understanding the nature of a particular investment and having the opportunity to purchase it. c. between high returns available on single instruments and the diversification of instruments into a portfolio. d. between the desired level of investment and possessing the resources necessary to carry it out. e. None of the above.

A

6. The purpose of calculating the covariance between two stocks is to provide a(n) ____ measure of their movement together. a. Absolute b. Relative c. Indexed d. Loglinear e. Squared

A

For an investor with a time horizon of 12 years and higher risk tolerance, an appropriate asset allocation strategy would be a. 100% stocks b. 30% cash, 50% bonds, and 20% stocks c. 10% cash, 30% bonds, and 60% stocks d. 50% bonds and 50% stocks e. 100% bonds

A

In a two stock portfolio, if the correlation coefficient between two stocks were to decrease over time, everything else remaining constant, the portfolio's risk would a. Decrease. b. Remain constant. c. Increase. d. Fluctuate positively and negatively. e. Be a negative value.

A

In an investment policy statement the objectives of an investor are expressed in terms of a. risk and return b. risk c. return d. time horizon e. liquidity needs

A

Modern portfolio theory assumes that most investors are a. Risk averse b. Risk neutral c. Risk seekers d. Risk tolerant e. None of the above

A

The variability of operating earnings is associated with a. Business risk. b. Liquidity risk. c. Exchange rate risk. d. Financial risk. e. Market risk.

A

Two factors that influence the nominal risk-free rate are; a. The relative ease or tightness in capital markets and the expected rate of inflation. b. The expected rate of inflation and the set of investment opportunities available in the economy. c. The relative ease or tightness in capital markets and the set of investment opportunities available in the economy. d. Time preference for income consumption and the relative ease or tightness in capital markets. e. Time preference for income consumption and the set of investment opportunities available in the economy.

A

Which of the following is not a life cycle phase? a. Discovery phase b. Accumulation phase c. Consolidation phase d. Spending phase e. Gifting phase

A

Which of the following statements is false? a. Unrealized capital gains are taxable. b. Realized capital gains are taxable. c. Tax-exempt investments are attractive to individuals with high tax liabilities. d. Returns comparisons should be made on an equivalent tax basis. e. Tax exempt investors prefer tax exempt investments.

A

____ gains are taxable and occur when an asset is sold for more than its basis (the value of the asset when it was purchased by the original owner, or inherited by the heirs of the original owner). a. Realized capital b. Income c. Portfolio d. Nominal e. Real

A

____ phase is the stage when investors in their early-to-middle earning years attempt to accumulate assets to satisfy near-term needs, e.g., children's education or down payment on a home. a. Accumulation b. Spending c. Gifting d. Consolidation e. Divestiture

A

____ refer(s) to the ability to convert assets to cash quickly and at a fair market price and often increase(s) as one approaches the later stages of the investment life cycle. a. Liquidity needs b. Time horizons c. Liquidation values d. Liquidation essentials e. Capital liquidations

A

3 Life Cycle Phases

Accumulation, Consolidation, Spending/Gifting

4. Markowitz believes that any asset or portfolio of assets can be described by ____ parameter(s). a. One b. Two c. Three d. Four e. Five

B

A decrease in the expected real growth in the economy, all other things constant, will cause the security market line to a. Shift up b. Shift down c. Have a steeper slope d. Have a flatter slope e. Remain unchanged

B

For an investor with a time horizon of 5 years and moderate risk tolerance, an appropriate asset allocation strategy would be a. 100% cash b. 30% cash, 50% bonds, and 20% stocks c. 20% cash, 40% bonds, and 40% stocks d. 10% cash, 30% bonds, and 60% stocks e. 100% bonds

B

Semi-variance, when applied to portfolio theory, is concerned with a. The square root of deviations from the mean. b. All deviations below the mean. c. All deviations above the mean. d. All deviations. e. The summation of the squared deviations from the mean.

B

The ability to sell an asset quickly at a fair price is associated with a. Business risk. b. Liquidity risk. c. Exchange rate risk. d. Financial risk. e. Market risk.

B

The first step in the investment process is the development of a(n) a. Objective statement. b. Policy statement. c. Financial statement. d. Statement of cash needs. e. Statement of cash flows.

B

The increase in yield spreads in late 2008 and early 2009 indicated that a. Credit risk premiums decreased b. Market risk premiums increased c. Investors are more confident of the future cash flows of bonds d. Non-investment grade bonds are less risky e. Government bonds are no longer a risk free investment

B

The policy statement may include a ____ against which a portfolio's or portfolio manager's performance can be measured. a. Milestone b. Benchmark c. Landmark d. Reference point e. Market pair

B

Unsystematic risk refers to risk that is a. Undiversifiable b. Diversifiable c. Due to fundamental risk factors d. Due to market risk e. None of the above

B

____ is an appropriate objective for investors who want their portfolio to grow in real terms, i.e., exceed the rate of inflation. a. Capital preservation b. Capital appreciation c. Portfolio growth d. Value additivity e. Nominal preservation

B

2. The rate of exchange between future consumption and current consumption is a. The nominal risk-free rate. b. The coefficient of investment exchange. c. The pure rate of interest. d. The consumption/investment paradigm. e. The expected rate of return.

C

For an investor with a time horizon of 4 years and higher risk tolerance, an appropriate asset allocation strategy would be a. 100% cash b. 30% cash, 50% bonds, and 20% stocks c. 20% cash, 40% bonds, and 40% stocks d. 10% cash, 40% bonds, and 50% stocks e. 100% bonds

C

For an investor with a time horizon of 6 to 10 years and lower risk tolerance, an appropriate asset allocation strategy would be a. 100% stocks b. 100% cash c. 30% cash, 50% bonds, and 20% stocks d. 10% cash, 30% bonds, and 60% stocks e. 100% bonds

C

Given a portfolio of stocks, the envelope curve containing the set of best possible combinations is known as the a. Efficient portfolio. b. Utility curve. c. Efficient frontier. d. Last frontier. e. Capital asset pricing model.

C

If a significant change is noted in the yield of a T-bill, the change is most likely attributable to a. A downturn in the economy. b. A static economy. c. A change in the expected rate of inflation. d. A change in the real rate of interest. e. A change in risk aversion.

C

In the phrase "nominal risk free rate"; nominal means a. Computed. b. Historical. c. Market. d. Average. e. Risk adverse.

C

SML graphs the expected relationship between: A. Business Rick and Financial Risk B. Systematic risk and unsystematic risk C. Risk and Return D. Systematic Risk. Unsystematic Return E. None of the Above

C

Sources of risk for an investment include a. Variance of returns and business risk b. Coefficient of variation of returns and financial risk c. Business risk and financial risk d. Variance of returns and coefficient of variation of returns e. All of the above

C

The ____ the variance of returns, everything else remaining constant, the ____ the dispersion of expectations and the ____ the risk. a. Larger, greater, lower b. Larger, smaller, higher c. Larger, greater, higher d. Smaller, greater, lower e. Smaller, greater, greater

C

The total risk for a security can be measured by its a. Beta with the market portfolio b. Systematic risk c. Standard deviation of returns d. Unsystematic risk e. Alpha with the market portfolio

C

What will happen to the security market line (SML) if the following events occur, other things constant: (1) inflation expectations increase, and (2) investors become more risk averse? a. Shift up and keep the same slope b. Shift up and have less slope c. Shift up and have a steeper slope d. Shift down and keep the same slope e. Shift down and have less slope

C

You are given a two asset portfolio with a fixed correlation coefficient. If the weights of the two assets are varied the expected portfolio return would be ____ and the expected portfolio standard deviation would be ____. a. Nonlinear, elliptical b. Nonlinear, circular c. Linear, elliptical d. Linear, circular e. Circular, elliptical

C

A decrease in the market risk premium, all other things constant, will cause the security market line to a. Shift up b. Shift down c. Have a steeper slope d. Have a flatter slope e. Remain unchanged

D

For an investor with a time horizon of 8 years and higher risk tolerance, an appropriate asset allocation strategy would be a. 100% stocks b. 100% cash c. 30% cash, 50% bonds, and 20% stocks d. 10% cash, 30% bonds, and 60% stocks e. 100% bonds

D

Important reasons for constructing a policy statement include: a. Helps investors decide on realistic investment goals b. Create a standard by which to judge the performance of the portfolio manager c. Develop an instrument to judge risk d. Choices a and b e. All of the above

D

Measures of risk for an investment include a. Variance of returns and business risk b. Coefficient of variation of returns and financial risk c. Business risk and financial risk d. Variance of returns and coefficient of variation of returns e. All of the above

D

Once the portfolio is constructed, it must be continuously a. Rebalanced. b. Recycled c. Reinvested d. Monitored. e. Manipulated.

D

The coefficient of variation is a measure of a. Central tendency. b. Absolute variability. c. Absolute dispersion. d. Relative variability. e. Relative return.

D

The probability of an adverse outcome is a definition of a. Statistics. b. Variance. c. Random. d. Risk. e. Semi-variance above the mean.

D

The uncertainty of investment returns associated with how a firm finances its investments is known as a. Business risk. b. Liquidity risk. c. Exchange rate risk. d. Financial risk. e. Market risk.

D

Which of the following is not a component of the required rate of return? a. Expected rate of inflation b. Time value of money c. Risk d. Holding period return e. All of the above are components of the required rate of return

D

Which of the following statements is true? a. Except for tax-exempt investors and tax-deferred accounts, annual tax payments increase investment returns. b. The only way to maintain purchasing power over time is to invest in bonds. c. After adjusting for taxes, long-term bonds consistently outperform stocks. d. An asset allocation decision for a taxable portfolio that does not include a substantial commitment to common stocks may make it difficult for the portfolio to maintain real value over time. e. None of the above

D

____ must be stated in terms of expected returns and risk. An investor's tolerance for risk must be established before returns objectives can be stated. a. Investment requirements b. Investment constraints c. Investment rewards d. Investment objectives e. Investment policy

D

Which of the following statements about the correlation coefficient is false? a. The values range between -1 to +1. b. A value of +1 implies that the returns for the two stocks move together in a completely linear manner. c. A value of -1 implies that the returns move in a completely opposite direction. d. A value of zero means that the returns are independent. e. None of the above (that is, all statements are true)

D, there may be a relationship, it is not linear however.

3. The Markowitz model is based on several assumptions regarding investor behavior. Which of the following is not such any assumption? a. Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period. b. Investors maximize one-period expected utility. c. Investors estimate the risk of the portfolio on the basis of the variability of expected returns. d. Investors base decisions solely on expected return and risk. e. None of the above (that is, all are assumptions of the Markowitz model)

E

Asset allocation is a. The process of dividing funds into asset classes. b. Concerned with returns variability. c. Concerned with the risk associated with different assets. d. Concerned with the relationship among investments' returns. e. All of the above.

E

For an investor with a time horizon of 15 years and moderate risk tolerance, an appropriate asset allocation strategy would be a. 100% stocks b. 40% cash and 60% stocks c. 30% cash, 50% bonds, and 20% stocks d. 50% bonds, and 50% stocks e. 20% bonds, and 80% stocks

E

Research has shown that the asset allocation decision explains ____% of the variation in fund returns across all funds, and ____% of the variation in returns for a particular fund over time. a. 90 and 100. b. 100 and 40. c. 90 and 40. d. 40 and 100. e. 40 and 90.

E

The asset allocation decision must involve a consideration of a. Cultural differences. b. The objectives stated in the investor's policy statement. c. The types of assets that are appropriate for the investor. d. The risk associated with different investments. e. All of the above.

E

The current outlay of money to guard against a potentially large future loss is commonly known as a. Asset management. b. Portfolio management. c. Minimizing risk. d. Loss control. e. Insurance.

E

The nominal risk free rate of interest is a function of a. The real risk free rate and the investment's variance. b. The prime rate and the rate of inflation. c. The T-bill rate plus the inflation rate. d. The tax free rate plus the rate of inflation. e. The real risk free rate and the rate of inflation.

E

The real risk-free rate is affected by a two factors; a. The relative ease or tightness in capital markets and the expected rate of inflation. b. The expected rate of inflation and the set of investment opportunities available in the economy. c. The relative ease or tightness in capital markets and the set of investment opportunities available in the economy. d. Time preference for income consumption and the relative ease or tightness in capital markets. e. Time preference for income consumption and the set of investment opportunities available in the economy.

E

When individuals evaluate their portfolios they should evaluate a. All the U.S. and non-U.S. stocks. b. All marketable securities. c. All marketable securities and other liquid assets. d. All assets. e. All assets and liabilities.

E

Which of the following is least likely to move a firm's position to the right on the Security Market Line (SML)? a. An increase in the firm's beta b. Adding more financial debt to the firm's balance sheet relative to equity c. Changing the business strategy to include new product lines with more volatile expected cash flows d. Investors perceive the stock as being more risky e. An increase in the risk-free required rate of return.

E

Which of the following is not a component of the risk premium? a. Business risk b. Financial risk c. Liquidity risk d. Exchange rate risk e. Unsystematic market risk

E

Which of the following is not a step in the portfolio management process? a. Develop a policy statement. b. Study current financial and economic conditions. c. Construct the portfolio. d. Monitor investor's needs and market conditions. e. Sell all assets and reinvestment proceeds at least once a year.

E

Which of the following is not considered to be an investment objective? a. Capital preservation b. Capital appreciation c. Current income d. Total return e. None of the above (that is, all are considered investment objectives)

E

Investments/investing style for consolidation phase

Moderately high risk investments, 70% stocks

Investments/investing style for Accumulation phase

Penny Stocks, Options, 90% stocks (risky)

Investments/investing style for Spending/Gifting phase

Preserve wealth, 60% bonds

All of the following are major sources of uncertainty EXCEPT a. Business risk b. Financial risk c. Default risk d. Country risk e. Liquidity risk

c, you assume they won't default