PORTFOLIO MANAGEMENT

A

. Information for Stock A and the market appear in the following table: Standard deviation of Stock A's return 40% Standard deviation of the market's return 20% Correlation of Stock A with the market 85% The beta of Stock A is closest to: A. 1.70. B. 2.35. C. 0.43.

B

A 35-year-old financial analyst expects to retire at the age of 65 and is interested in investing to fund her retirement. She describes herself as being financially astute with average risk tolerance. Which asset class is least likely to be suitable for a majority allocation in her portfolio to meet her retirement needs? A. Long-term bonds B. US Treasury bills C. Exchange-listed equities

B

A correlation matrix of the returns for securities A, B, and C is reported below: Security A B C A 1 B 0.5 1 C 0 −0.5 1 Assuming that the expected return and the standard deviation of each security are the same, a portfolio consisting of an equal allocation of which two securities will be most effective for portfolio diversification? A. Securities A and C B. Securities B and C C. Securities A and B

B

A financial adviser gathers the following information about a new client: The client is a successful economics professor at a major university. The client plans to work full time for seven years and then will work part time for three years before retiring. The client owns two homes and does not have any outstanding debt. The client has accumulated retirement savings of approximately $2 million through his employer's retirement plan and will have anticipated retirement spending needs of $60,000 per year. The client reads numerous financial publications and follows markets closely. Although concerned about the current health of the global economy, the client maintains that he is a long-term investor. Based on the above information, which of the following best describes this client? A. High ability to take risk but a low willingness to take risk B. High ability to take risk and a high willingness to take risk C. Low ability to take risk but a high willingness to take risk

A

A key difference between a wrap account and a mutual fund is that wrap accounts: A. have assets that are owned directly by the individual. B. cannot be tailored to the tax needs of a client. C. have a lower required minimum investment.

C

A portfolio contains equal weights of two securities having the same standard deviation. If the correlation between the returns of the two securities was to decrease, the portfolio risk would most likely: A. increase. B. remain the same. C. decrease.

B

A portfolio contains equal weights of two securities that have the same standard deviation. If the correlation between the returns of the two securities was to decrease, the portfolio risk would most likely: A. increase. B. decrease. C. remain the same.

C

A portfolio has the following returns: Portfolio Returns 2006 2.4 2007 9.6 2008 4.0 2009 5.6 2010 4.8 2011 3.2 The sample variance of the portfolio is closest to: A. 0.23%. B. 0.36%. C. 0.28%.

A

A portfolio invested in two assets has an expected return of 11%. If expected returns for Assets A and B, respectively, are 8% and 12%, then the portfolio weight of Asset B is closest to: A. 75%. B. 50%. C. 25%.

A

A portfolio manager generated a rate of return of 15.5% on a portfolio with beta of 1.2. If the risk-free rate of return is 2.5% and the market return is 11.8%, Jensen's alpha for the portfolio is closest to: A. 1.84%. B. 4.34%. C. 3.70%.

B

A return-generating model that provides an estimate of the expected return of a security based on such factors as earnings growth and cash flow generation is best described as a: A. market factor model. B. fundamental factor model. C. macroeconomic factor model.

C

A risk metric that measures how different an actual investment outcome could be from what the investor expects is most likely a: A. vega. B. duration. C. standard deviation.

C

A security has a beta of 1.30. If the risk-free rate of interest is 3% and the expected return of the market is 8%, based on the capital asset pricing model (CAPM), the expected return of the security is closest to: A. 6.5%. B. 13.4%. C. 9.5%.

B

A stock has a correlation of 0.45 with the market and a standard deviation of returns of 12.35%. If the market has a standard deviation of returns of 8.25%, then the beta of the stock is closest to: A. 0.30. B. 0.67. C. 1.50.

A

A successful portfolio risk budget will most likely: A. lead to investment in assets with the highest return per unit of risk. B. be based on multiple sources of risk. C. produce superior performance compared to passive investing.

C

ABC Company has an obligation to pay a certain amount each month to each of its employees after they retire. This obligation is most likely known as a(n): A. endowment. B. defined-contribution pension plan. C. defined-benefit pension plan.

C

An analyst observes that the historic geometric nominal return for equities is 9%. Given a real return of 1% for riskless Treasury bills and annual inflation of 2%, the real rate of return and risk premium for equities are closest to: A. 7.9% and 5.8%. B. 6.9% and 7.9%. C. 6.9% and 5.8%.

B

An asset has an annual return of 19.9%, standard deviation of returns of 18.5%, and correlation with the market of 0.9. If the standard deviation of returns on the market is 15.9% and the risk-free rate is 1%, the beta of this asset is closest to: A. 1.02. B. 1.05. C. 1.16

B

An investment portfolio consists of equal weights in two government bonds of different nations. What correlation level will most likely result in the lowest portfolio standard deviation? A. 0.5 B. −0.2 C. 0.0

B

An investor earns the following annual returns over a four-year period: Year Annual Return 1 12.2% 2 −8.5% 3 6.7% 4 −3.3% The geometric mean annual return is closest to: A. 5.93%. B. 1.45%. C. 1.78%.

A

Based on the capital asset pricing model (CAPM), the expected return on FGL Corp's shares is 12%. Using a model independent of the CAPM, an analyst has estimated the returns on the stock at 10%. Based on this information, the analyst is most likely to consider the stock to be: A. overvalued. B. correctly valued. C. undervalued.

C

Based on the following historical data, which is closest to the standard deviation for the two-asset portfolio shown in the table? Asset A Asset B Asset A and B Standard deviation 4.7% 7.7% Portfolio weight 0.4 0.6 Correlation 0.3 A. 6.5% B. 5.0% C. 5.5%

C

Based on the information in the table, which of the following is closest to the geometric mean annual return for the full period of 2010-2014? Annual Return 12/31/2010 −8.0% 12/31/2011 −5.5% 12/31/2012 −7.2% 12/31/2013 20.8% 12/30/2014 4.4% A. 0.90% B. 1.75% C. 0.35%

A

For a portfolio consisting of two assets with a correlation coefficient of +1.0, it is most likely that portfolio risk is: A. equal to the weighted average of the risk of the two assets in the portfolio. B. less than the weighted average of the risk of the two assets in the portfolio. C. greater than the weighted average of the risk of the two assets in the portfolio.

C

If Investor A has a lower risk aversion coefficient than Investor B, on the capital allocation line, will Investor B's optimal portfolio most likely have a higher expected return? A. Yes B. No, because Investor B has a higher risk tolerance C. No, because Investor B has a lower risk tolerance

A

In a good risk management process, the duties of Chief Risk Officer (CRO) least likely include: A. setting the risk tolerance of the organization. B. participating in the key strategic decisions of the organization. C. building the risk framework for the organization.

A

In the context of strategic asset allocation, adding asset classes with low correlation will most likely improve a portfolio's risk-return trade-off as long as the stand-alone risk of the added asset class: A. does not exceed its diversification effect. B. equals its diversification effect. C. exceeds its diversification effect.

B

Jim Cotter is considering investing in a stock index fund and a property investment fund. His planned investment amounts, fund returns, and standard deviations are given in the table. The correlation between the two funds is −0.1. Fund Investment Amount Expected Return Standard Deviation Stock index 10m 20% 35% Property investment 90m 33% 70% The portfolio's standard deviation is closest to: A. 63.10%. B. 62.75%. C. 63.45%.

A

John Smith is given two investment options. Option A is a payment with a 50% chance of getting $100 and a 50% chance of getting $0. Option B is a guaranteed payment of $50. If Smith chooses Option A over Option B, his risk preference is best described as risk: A. seeking. B. averse. C. neutral.

B

Last year, a portfolio manager earned a return of 12%. The portfolio's beta was 1.5. For the same period, the market return was 7.5%, and the average risk-free rate was 2.7%. Jensen's alpha for this portfolio is closest to: A. 4.50%. B. 2.10%. C. 0.75%.

B

Maria Delanie is an investor in a hedge fund. Based on the data in the table, the money-weighted return she earned is closest to: Year Beginning of Year Account Balance Net return of the fund 1 30m 10% 2 40m −5% 3 30m −5% A. −1.523%. B. −0.524%. C. −0.749%.

C

Selected information about shares of two companies is provided in the following table: Stock Standard Deviation Correlation of Returns* Portfolio Weights Cable Incorporated 30% 0.65 68% GPT Company 20% 32% * Correlation of returns between Cable Incorporated and GPT Company. The standard deviation of returns of the portfolio formed with these two stocks is closest to: A. 32.85%. B. 26.80%. C. 25.04%.

C

Stock X and Stock Y have the same level of total risk. Stock X has twice the systematic risk of Stock Y and half its non-systematic risk. Stock X's expected return will most likely be: A. the same as the expected return of Stock Y. B. lower than the expected return of Stock Y. C. higher than the expected return of Stock Y.

C

The 15-month holding period return for a security is 12%. Its annualized return is closest to: A. 10.03%. B. 9.60%. C. 9.49%.

B

The ABC Fund has achieved returns of 20%, 17%, and −33% in the past three years, respectively. The fund's geometric mean return for the past three years is closest to: A. 1.30%. B. −2.02%. C. −5.93%.

B

The Aztech Fund had the following annual returns for the past five years. Year 1 2 3 4 5 Return 12% −8% −4% 25% 10% The fund's variance is closest to: A. 0.1821. B. 0.0176. C. 0.1327.

B

The annualized return for an investor who has achieved a return of 5% over a six-week period is closest to: A. 43.33%. B. 52.63%. C. 54.24%.

C

The slope of the security market line is best derived from the: A. risk-free rate of return. B. beta of the security. C. market risk premium.

C

The stock of GBK Corporation has a beta of 0.65. If the risk-free rate of return is 3% and the expected market return is 9%, the expected return for GBK is closest to: A. 10.8%. B. 3.9%. C. 6.9%.

B

The correlation between the historical returns of Stock A and Stock B is 0.75. If the variance of Stock A is 0.16 and the variance of Stock B is 0.09, the covariance of returns of Stock A and Stock B is closest to: A. 0.01. B. 0.09. C. 0.16.

C

The following table presents historical information for two stocks, RTF and KIU: Variance of returns for RTF 0.0625 Variance of returns for KIU 0.0900 Correlation coefficient between RTF and KIU 0.4500 The covariance between RTF and KIU is closest to: A. 0.0025. B. 0.0675. C. 0.0338.

A

The following table shows data for the stock of JKU and a market index. Expected return of JKU 15% Expected return of market index 12% Risk-free rate 5% Standard deviation of JKU returns 20% Standard deviation of market index returns 15% Correlation of JKU and market index returns 0.75 Based on the capital asset pricing model (CAPM), JKU is most likely: A. undervalued. B. fairly valued. C. overvalued

A

The point of tangency between the capital allocation line (CAL) and the efficient frontier of risky assets most likely identifies the: A. optimal risky portfolio. B. optimal investor portfolio. C. global minimum-variance portfolio.

B

The return measure that best allows one to compare asset returns earned over different length time periods is the: A. holding period return. B. annualized return. C. net portfolio return.

A

The strategic asset allocation and portfolio rebalancing policy are most likely addressed in which section of an investment policy statement? A. Appendices B. Investment objectives C. Procedures

B

Two investors have utility functions that differ only with regard to the coefficient of risk aversion. Relative to the investor with a higher coefficient of risk aversion, the optimal portfolio for the investor with a lower coefficient of risk aversion will most likely have: A. a lower level of risk and return. B. a higher level of risk and return. C. the same level of risk and return.

C

Two risk managers are discussing how an organization's risk tolerance should be determined. The first manager says, "The risk tolerance must reflect the losses or shortfalls that will cause the organization to fail to meet critical objectives." The second manager responds, "The risk tolerance must reflect the external forces that bring uncertainty to the organization." Which of them is most likely correct? A. The second risk manager B. The first risk manager C. Both risk managers

B

When considering a portfolio that is optimal for one investor, a second investor with a higher risk aversion would most likely: A. expect a higher variance for the portfolio. B. derive a lower utility from the portfolio. C. have a lower return expectation for the portfolio.

A

When constructing the optimal portfolios for investors with different risk preferences, the investor with the higher risk aversion is most likely to have a: A. lower expected return. B. steeper capital allocation line. C. flatter indifference curve.

C

Which of the following is least likely a part of the execution step of the portfolio management process? A. Security analysis B. Portfolio construction C. Performance measurement

A

Which of the following is least likely an assumption underlying the capital asset pricing model (CAPM)? A. Investors analyze securities according to their own future cash flow estimates and probability distributions. B. There are no restrictions on short selling assets. C. The amount invested in an asset can be as much or as little as the investor wants.

B

Which of the following is least likely true for a separately managed account (SMA) compared with a mutual fund? A. Assets are directly owned by the individual. B. The minimum investment required to open a SMA is lower than that of a mutual fund. C. Transactions can be tailored to the specific tax needs of the investor.

A

Which of the following is most likely a part of the feedback step in the portfolio management process? A. Performance measurement B. Developing the investment policy statement C. Portfolio construction

C

Which of the following performance measures most likely relies on systematic risk as opposed to total risk when calculating a risk-adjusted return? A. Sharpe ratio B. M-squared C. Treynor ratio

B

Which of the following portfolio performance measures are the most appropriate for an investor who holds a fully diversified portfolio? A. Sharpe ratio and Treynor ratio. B. Treynor ratio and Jensen's alpha. C. M-Squared and Sharpe ratio.

C

Which of the following types of investment clients most likely have the lowest liquidity needs? A. Insurance companies B. Banks C. Endowments and foundations

A

Which of the following types of mutual funds most likely places the highest pressure on the portfolio manager to manage liquidity? A. A no-load open-end fund B. A load closed-end fund C. A no-load closed-end fund

B

With respect to the portfolio management process, the execution step most likely includes: A. portfolio monitoring. B. asset allocation. C. developing the investment policy statement.

C

You are preparing an investment policy statement for a client who manages her own successful marketing consultancy. Her annual income is approximately $500,000. She describes herself as a finance novice. Most of her savings are invested in bank term deposits and short-term government securities. In her responses to the standard risk assessment questionnaire, she strongly agrees with the statements that she "feels more comfortable putting money in a bank account than in the stock market." Also, she "thinks of the word 'risk' as being a 'loss'". Based on this information, your client's ability and willingness to take risk can best be described as: A. low ability and high willingness. B. high ability and willingness. C. high ability and low willingness.