Unit 16

The management style that is most similar to buy and hold is: A. strategic management B. contrarian C. tactical management D. active management

A. A strategic style, sometimes referred to as passive, is less apt to have a high degree of portfolio turnover than active or tactical management. Contrarian style generally involves taking positions that are currently out of favor in the market place, but would incur somewhat frequent activity.

Investors wishing to employ a passive strategy for their bond portfolios would most likely elect which of the following? A. barbell B. Buy and hold C. bullet D. Laddering

B. Among investing strategies, it is hard to find one more passive than buy and hold - nothing is traded until maturity. Each of the other strategies involve some degree of activity.

As compared to value investors, growth investors tend to: A. take more of a long-term approach to their investments B. look for companies whose sales, earnings, or market share are increasing at an above-average rate. C. look for companies that are undervalued or overlooked by other investors. D. be ver price-conscious when purchasing stocks

B. Growth investors look for stocks in companies that are growing very quickly. Because they focus on growth rates, they do not look so closely at price when they make their investments; they don't mind paying a high price for a stock they believe er will continue to grow. Growth stocks tend to be somewhat volatile, so growth investors must actively manage their portfolios in response to fluctuating growth rates. Because growth stocks are volatile, growth investors take more of a short-term approach to investing than do value investors.

Which of the following is a characteristic of the passive investment style? A. High portfolio turnover B. income rather than growth objective C. rebalancing D. tactical management

C. Because the passive (strategic) style of investing does not involve frequent trading ( as does the tactical or active style), periodically the portfolio will be rebalanced to insure that the asset mix is at the desired level. This style may be used for either income or growth objectives.

An investor can choose between four portfolios with the following expected returns and standard deviations. Based on Modernest Portfolio theory (MPT), which portfolio should the investor choose? A. 6% expected return, 21% standard Deviation B. 8% expected return, 21% standard Deviation C. 8% expected return, 20% standard Deviation D. 7% expected return, 22% standard Deviation

C. MPT preaches that investors will always seek the highest return commensurate with the lowest risk. The highest return is 8%. There are two portfolios with that rate, but one of them has a lower risk (20% versus 21%).

An investment strategy where a higher price is paid for a stock base on expected return is: A. dollar cost averaging B. return on investment C. future investing D. Growth investing

D. A growth investor purchases shares that have exhibited faster-than-average gains in earnings over the past few years that is likely to continue to show high levels of margin. Over the long run, growth stocks tend to outperform the market but are riskier than most other stocks and generally pay little or no dividend.

Followers of the efficient market hypothesis believe that A. following the business cycle is the best way to maximize returns B. concentration rather than diversification will produce superior returns C. by following the pundits on TV, you'll wind up rich D. an efficient market is one that produces random results

D. EMH is really just an extension of the Random Walk Theory, which states that throwing darts at the stock market page is as good as any way to select investments. If the market is truly efficient, no one has an edge.

Buying stocks with high PE rations normally reflect which fo the following investment styles? A. Growth B. Value C. Special Situations D. Turnaround

A. The purchase of stocks with high PE ratios represent a growth investment style. Growth0oriented investors will pay high PE ratios. Value investment style is associated with the purchase of low PE stocks or stocks trading below their intrinsic value.

You have a client who has recently retired. A pressing question is, "How much can be withdrawn without running out of money?" One of the popular techniques for approximating an answer is by using A. the random walk hypothesis B. Monte Carlo simulations C. LIBOR approximations D. Portfolio rebalancing

B. One of the uses of Monte Carlo simulations is to run thousands of potential scenarios to determine what withdrawal rate will likely last the longest.

The expected return on the market is 15%, the risk-free rate is 8%, and the beta for Stock A is 1.2. Compute the rate of return to be expected (required) on this stock. A. 7% B. 8.4% C. 16.4% D. 18%

C. We take risk-free rate of 8% and add that to the product of the stock's beta and the (expected return minus the risk-free rate). Expressed in numbers, it is 8% + 1.2(15% - 8%) = 8% + 1.2(7%) = 8% + 8.4% = 16.4%

Which of the following market analysts is using the efficient market theory? A. Before he invests in a company an analyst visits its headquarters to se whether management is running the company effectively. B. An analyst sells stock when he sees small investors buying C. An analyst has developed a system for identifying reversals in downward trend-lines D. An analyst picks company names out of a hat

D. Efficient market theory holds that securities are efficiently priced and therefore, it makes no sense to analyze particular stocks; or rather, picking stocks out of a hat is as effective as technical or fundamental analysis.

the concept of creating a model portfolio, through asset allocation principles, that both increases returns and reduces risk is known as: A. risk reduction fundamentals B. rebalancing C. corrective adaptation D. portfolio optimization

D. One of the primary concepts of asset allocation is the performance of a portfolio can be enhanced while also reducing the associated risk. This is accomplished through a proper allocation of assets, among many different asset categories, to establish a portfolio suitable for the investor's risk tolerance and desired performance. This model portfolio would lie on the efficient frontier, thus representing the optimal portfolio for the client-maximum return with the least risk.

In the field of portfolio management, there are a number of different management styles. One of those styles involves committing additional capital to the market when others are reducing their exposure, or eliminating positions while others are increasing theirs. This style is generally referred to as: A. Active B. Value C. Growth D. Contrarian

D. The contrarian style of portfolio management takes positions opposite those of the market as a whole. They are buying when others are selling and selling when others are buying.