Portfolio

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

No, because Investor B has a lower risk tolerance

Which of the following types of risk is most likely avoided by forming a diversified portfolio? Total risk. Systematic risk. Nonsystematic risk.

Nonsystematic risk.

An investment in 10,000 common shares of a company for one year earned a 15.5% return. The investor received a $2,500 dividend just prior to the sale of the shares at $24 per share. The price that the investor paid for each share one year earlier was closest to: $20.80. $20.50. $21.00.

$21.00. HPR = (P1 − P0 + D1)/P0 D1: $2,500/10,000 shares = $0.25/shares 0.155 = (24 − P0 + 0.25)/P0

A technical analyst observes a head and shoulders pattern in a stock she has been following. She notes the following information: Head price $83.50 Shoulder price $72.00 Neckline price $65.75 Current price $64.00 Based on this information, her estimate of the price target is closest to: $59.50. $48.00. $44.50.

$48.00. Price target = $65.75 − ($83.50 − $65.75)

**If a company has a one-day 5% Value at Risk of $1 million, this means: 5% of the time the firm is expected to lose at least $1 million in one day. 95% of the time the firm is expected to lose at least $1 million in one day. 5% of the time the firm is expected to lose no more than $1 million in one day.

*5% of the time* the firm is expected to lose *at least* $1 million in one day.

With respect to an investor's utility function expressed as: U=E(r)− 1Aσ*2 /2 which of the following values for the measure for risk aversion has the least amount of risk aversion? −4. 0. 4.

-4

The portfolio of a risk-free asset and a risky asset has a better risk-return tradeoff than investing in only one asset type because the correlation between the risk-free asset and the risky asset is equal to: −1.0. 0.0. 1.0.

0.0. A portfolio of the risk-free asset and a risky asset or a portfolio of risky assets can result in a better risk-return tradeoff than an investment in only one type of an asset, because the risk-free asset has zero correlation with the risky asset.

A portfolio manager creates the following portfolio: Security Security Weight (%) Expected Standard Deviation (%) 1 30 20 2 70 12 Q. If the standard deviation of the portfolio is 14.40%, the covariance between the two securities is equal to: 0.0006. 0.0240. 1.0000.

0.0240. Cov(R1,R2) = ρ12σ1σ2 = (1.0)(20%)(12%) = 2.40% = 0.0240.

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: 0.0025. 0.0675. 0.0338.

0.0338.

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: 0.01. 0.09. 0.16.

0.09.

The following information is provided about a stock market index m and security i: Statistic Value Covariance between market return and security return [Cov(Ri,Rm)] 0.01104 Correlation coefficient between market return and security return (ρi,m) 0.3 Standard deviation of market return (σm) 0.16 The beta of security i,βi, is closest to: 0.43. 0.23. 1.88.

0.43.

An analyst observes the following annual rates of return for a hedge fund: YearReturn(%) 2008 22 2009 −25 2010 11 Q. The hedge fund's annual geometric mean return is closest to: 0.52%. 1.02%. 2.67%.

0.52%. [(1 + 0.22)(1 − 0.25)(1 + 0.11)](1/3) − 1 = 1.0157(1/3) − 1 = 0.0052 = 0.52%

An analyst obtains the following annual rates of return for a mutual fund: Year Return(%) 2008 14 2009 −10 2010 −2 Q. The fund's holding period return over the three-year period is closest to: 0.18%. 0.55%. 0.67%.

0.55%. [(1 + 0.14)(1 − 0.10)(1 − 0.02)] - 1 = 0.0055 = 0.55%.

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: 0.30. 0.67. 1.50.

0.67.

The variance of returns of a security and the market portfolio are 0.25 and 0.09, respectively. If the covariance of security returns and market returns is 0.06, the security's beta is closest to: 0.24. 0.67. 0.40.

0.67. βi=Cov(Ri,Rm)/σ^2m=0.060.09=0.67

A portfolio manager creates the following portfolio: Security Security Weight (%) Expected Standard Deviation (%) 1 30 20 2 70 12 Q. If the standard deviation of the portfolio is 14.40%, the correlation between the two securities is equal to: −1.0. 0.0. 1.0.

1.0.

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: 1.02. 1.05. 1.16

1.05.

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: 5.93%. 1.45%. 1.78%.

1.45%.

An investor with $10,000 decides to borrow an additional $5,000 at the risk-free rate and invest all the available funds in the market portfolio. This investor's portfolio beta is closest to: 0.5. 1.0. 1.5.

1.5. The weight in the market portfolio is 15,000/10,000 = 1.5 and the weight in the risk-free asset is -5,000/10,000 = -0.5. Because the beta of the risk-free asset is 0 and the market portfolio's beta is 1, the portfolio's beta is βp = 0(-0.5) + 1(1.5) = 1.5.

. The covariance of the assets in the following portfolio is closest to: Asset 1 Asset 2 Asset 1 vs. Asset 2 Correlation 0.8 Portfolio weight 0.6 0.4 Variance 3.5% 1.5% 1.8% 0.4% 2.3%

1.8% Cov = ρ1,2×σ1×σ2

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: 1.84%. 4.34%. 3.70%.

1.84%. Jensen's alpha = Rp - [Rf + βp(Rm - Rf)] = 0.155 - [0.025 + 1.2 × (0.118 - 0.025)] = 0.0184

An analyst gathers the following information: Security Expected Standard Deviation (%) Beta Security 1 25 1.50 Security 2 15 1.40 Security 3 20 1.60 Q. With respect to the capital asset pricing model, if the expected market risk premium is 6% and the risk-free rate is 3%, the expected return for Security 1 is closest to: 9.0%. 12.0%. 13.5%.

12.0%. 12.0% = 3% + 1.5(6%)

A portfolio manager creates the following portfolio: Security Security Weight (%) ExpectedStandard Deviation (%) 1 30 20 2 70 12 Q. If the correlation of returns between the two securities is 0.40, the expected standard deviation of the portfolio is closest to: 10.7%. 11.3%. 12.1%.

12.1%. (0.3600%+0.7056%+0.4032%)^0.5

A portfolio manager creates the following portfolio: Security Expected Annual Return (%) Expected Standard Deviation (%) 1 16 20 2 12 20 If the correlation of returns between the two securities is −0.15, the expected standard deviation of an equal-weighted portfolio is closest to: 13.04%. 13.60%. 13.87%.

13.04%.

A portfolio manager creates the following portfolio: Security Expected Annual Return (%) Expected Standard Deviation (%) 1 16 20 2 12 20 If the two securities are uncorrelated, the expected standard deviation of an equal-weighted portfolio is closest to: 14.00%. 14.14%. 20.00%.

14.14%.

Information about a portfolio that consists of two assets is provided below: Asset Portfolio Weight Standard Deviation A 25% 12% B 75% 16% If the correlation coefficient between the two assets is 0.75, the standard deviation of the portfolio is closest to: 15.00%. 12.37%. 14.39%.

14.39%.

The risk-free rate is 5%, and the market risk premium is 8%. If the beta of TRL Corp. is 1.5, based on the capital asset pricing model (CAPM), the expected return of TRL's stock is closest to: 17.0%. 9.5%. 15.5%.

17.0%.

Following its decision to divest its non-core assets, analysts expect HCL Corp's standard deviation of returns to rise to 30% and its correlation with the market portfolio to remain unchanged at 0.8. The risk-free rate and the market risk premium are expected to remain unchanged at 6% and 8%, respectively. The market portfolio's standard deviation of returns, however, is expected to decrease to 15%. The firm's expected return after the restructure is closest to: 9.2%. 17.6%. 18.8%.

18.8%. beta = 0.8*0.3/.15 = 1.6 E(R) = 0.06 + (0.08)1.6 = 18.8%.

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: 4.50%. 2.10%. 0.75%.

2.10%. 0.12 − [0.027 + 1.5(0.075 − 0.027)]

A portfolio manager creates the following portfolio: Security Security Weight (%) Expected Standard Deviation (%) 1 30 20 2 70 12 Q. If the covariance of returns between the two securities is −0.0240, the expected standard deviation of the portfolio is closest to: 2.4%. 7.5%. 9.2%.

2.4%. (0.3600%+0.7056%−1.008%)^0.5

The following table represents the history of an investment in a company: Time Activity Price per Share Dividends Paid per Share Beginning of Year 1 Purchase 10 shares €160 €0 End of Year 1 Purchase 5 shares €168 €3.00 End of Year 2 N/A €175 €4.00 End of Year 3 Sell 15 shares €165 €0.00 The investor does not reinvest the dividends that he receives. Ignoring taxes, the time-weighted rate of return on this investment is closest to: 2.57%. 1.93%. 2.40%.

2.40%.

An analyst observes the following historic geometric returns: Asset Class Geometric Return (%) Equities 8.0 Corporate Bonds 6.5 Treasury bills 2.5 Inflation 2.1 Q. The risk premium for corporate bonds is closest to: 3.5%. 3.9%. 4.0%.

3.9%.

An investor's transactions in a mutual fund and the fund's returns over a four-year period are provided in the following table: Year 1 2 3 4 New investment at the beginning of the year (US$)2,500 1,500 1,000 0 Investment return for the year -20% 65% -25% 10% Withdrawal by investor at the end of the year (US$) 0 -500 -500 0 Based on this data, the money-weighted return (or internal rate of return) for the investor is closest to: 2.15%. 7.50%. 3.96%.

3.96%. CF0 = -2500 CF1 = -1500 CF2 = -500 CF3 = -500 CF4 = 4626.88

An analyst gathers the following information about the performance of a portfolio ($ millions): Quarter Value at Beginning of Quarter (Prior to Inflow or Outflow) Cash Inflow (Outflow) at Beginning of Quarter Value at End of Quarter 1 2.0 0.2 2.4 2 2.4 0.4 2.6 3 2.6 (0.2) 3.2 4 3.2 1.0 4.1 Q. The portfolio's annual time-weighted rate of return is closest to: 8% 32% 27%

32% 9.09% = (2.4-(2.0+0.2))/(2.0+0.2) (1 + 9.09%) × (1 − 7.14%) × (1 + 33.33%) × (1 − 2.38%) − 1

An asset management firm generated the following annual returns in their US large-cap equity portfolio: Year Net Return (%) 2008 -34.8 2009 32.2 2010 11.1 2011 -1.4 The 2012 return needed to achieve a trailing five-year geometric mean annualized return of 5% when calculated at the end of 2012 is closest to: 27.6%. 17.9%. 35.2%.

35.2%.

An analyst observes the following historic geometric returns: Asset Class Geometric Return (%) Equities 8.0 Corporate Bonds 6.5 Treasury bills 2.5 Inflation 2.1 Q. The real rate of return for corporate bonds is closest to: 4.3%. 4.4%. 4.5%.

4.3%. (1 + 0.065)/(1 + 0.0210) - 1 = 4.3%

An analyst observes the following historic geometric returns: Asset Class Geometric Return (%) Equities 8.0 Corporate Bonds 6.5 Treasury bills 2.5 Inflation 2.1 Q. The risk premium for equities is closest to: 5.4%. 5.5%. 5.6%.

5.4% (1 + 0.080)/(1 + 0.0250) - 1 = 5.4%

An analyst observes the following historic geometric returns: Asset Class Geometric Return (%) Equities 8.0 Corporate Bonds 6.5 Treasury bills 2.5 Inflation 2.1 Q. The real rate of return for equities is closest to: 5.4%. 5.8%. 5.9%.

5.8%. (1 + 0.080)/(1 + 0.0210) - 1 = 5.8%

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

52.63%.

Nikolai Kondratieff concluded in the 1920s that since the 1780s, Western economies have generally followed a cycle of how many years? 18. 54. 76.

54

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: 7.9% and 5.8%. 6.9% and 7.9%. 6.9% and 5.8%.

6.9% and 5.8%. [(1 + 0.09)/(1 + 0.02)] − 1 = 6.9%, [(1 + 0.069)/(1 + 0.01)] − 1 = 5.8%

An investor performs the following transactions on the shares of a firm. At t = 0, she purchases a share for $1,000. At t = 1, she receives a dividend of $25 and then purchases three additional shares for $1,055 each. At t = 2, she receives a total dividend of $100 and then sells the four shares for $1,100 each. Q. The money-weighted rate of return is closest to: 4.5%. 6.9%. 7.3%.

6.9%. use financial calculator: cf0 = -1000 cf1 = -3165+25 cf2 = 100+4400 IRR?

If the expected return on the market portfolio is 6% and the risk-free rate is 2%, the expected return of a security with a beta of 1.25 is closest to: 7.00%. 5.00%. 9.50%.

7.00%.

Consider a portfolio with two assets. Asset A comprises 25% of the portfolio and has a standard deviation of 17.9%. Asset B comprises 75% of the portfolio and has a standard deviation of 6.2%. If the correlation of these two investments is 0.5, the portfolio standard deviation is closest to: 6.45%. 7.90%. 9.13%.

7.90%.

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: 75%. 50%. 25%.

75%.

A portfolio manager creates the following portfolio: Security Expected Annual Return (%) Expected Standard Deviation (%) 1 16 20 2 12 20 If the portfolio of the two securities has an expected return of 15%, the proportion invested in Security 1 is: 25%. 50%. 75%.

75%. Rp=w1×R1+(1 −w1)×R2 Rp=w1×16%+(1−w1)×12% 15%=0.75(16%)+0.25(12%)

Based on historical returns, a portfolio has a Sharpe ratio of 2.0. If the mean return to the portfolio is 20%, and the mean return to a risk-free asset is 4%, the standard deviation of return on the portfolio is closest to: 12%. 8%. 10%.

8%. (0.2-0.04)/2

An investor purchases one share of stock for $85. Exactly one year later, the company pays a dividend of $2.00 per share. This is followed by two more annual dividends of $2.25 and $2.75 in successive years. Upon receiving the third dividend, the investor sells the share for $100. The money-weighted rate of return on this investment is closest to: 7.97%. 8.15%. 8.63%.

8.15%. CF0 = −85, CF1 = 2, CF2 = 2.25, CF3 = 102.75

An investor purchases 100 shares of stock at $40 per share. The investor holds the shares for exactly one year and then sells all of them at $41.50 per share. On the date of sale, the investor receives dividends totaling $200. The holding period return (HPR) on the investment is closest to: 8.75%. 3.75%. 8.43%.

8.75%. (41.50 − 40 + 2)/40

Over a period of 16 months, an investor has earned a return of 12%. The investor's annualized return is closest to: 9.38%. 8.87%. 9.00%

8.87%. 1.12^(12/16) - 1

An analyst gathers the following information: Security Expected Standard Deviation (%) Beta Security 1 25 1.50 Security 2 15 1.40 Security 3 20 1.60 With respect to the capital asset pricing model, if expected return for Security 2 is equal to 11.4% and the risk-free rate is 3%, the expected return for the market is closest to: 8.4%. 9.0%. 10.3%.

9.0%. 11.4% = 3% + 1.4(X%)

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

9.49%.

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: 6.5%. 13.4%. 9.5%.

9.5%.

Which flow-of-funds indicator is considered bearish for equities? A large increase in the number of IPOs. Higher-than-average cash balances in mutual funds. An upturn in margin debt but one that is still below the long-term average

A large increase in the number of IPOs.

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

A no-load open-end fund

Which of the following best describes the underlying rationale for a written investment policy statement (IPS)? A written IPS communicates a plan for trying to achieve investment success. A written IPS provides investment managers with a ready defense against client lawsuits. A written IPS allows investment managers to instruct clients about the proper use and purpose of investments.

A written IPS communicates a plan for trying to achieve investment success.

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

Appendices

Which type of triangle pattern most likely exhibits a horizontal trendline connecting the high prices? Triple top Symmetrical Ascending

Ascending In an ascending triangle pattern, the trendline connecting the high prices is horizontal

An analyst has made the following return projections for each of three possible outcomes with an equal likelihood of occurrence: Asset Outcome 1(%) Outcome 2(%) Outcome 3(%) Expected Return(%) 1 12 0 6 6 2 12 6 0 6 3 0 6 12 6 If the analyst constructs two-asset portfolios that are equally weighted, which pair of assets provides the least amount of risk reduction? Asset 1 and Asset 2. Asset 1 and Asset 3. Asset 2 and Asset 3.

Asset 1 and Asset 2.

An analyst has made the following return projections for each of three possible outcomes with an equal likelihood of occurrence: Asset Outcome 1(%) Outcome 2(%) Outcome 3(%) Expected Return(%) 1 12 0 6 6 2 12 6 0 6 3 0 6 12 6 If the analyst constructs two-asset portfolios that are equally-weighted, which pair of assets has the lowest expected standard deviation? Asset 1 and Asset 2. Asset 1 and Asset 3. Asset 2 and Asset 3.

Asset 2 and Asset 3.

An analyst has made the following return projections for each of three possible outcomes with an equal likelihood of occurrence: Asset Outcome 1(%) Outcome 2(%) Outcome 3(%) Expected Return(%) 1 12 0 6 6 2 12 6 0 6 3 0 6 12 6 Q. Which pair of assets is perfectly negatively correlated? Asset 1 and Asset 2. Asset 1 and Asset 3. Asset 2 and Asset 3.

Asset 2 and Asset 3.

With respect to an equally-weighted portfolio made up of a large number of assets, which of the following contributes the most to the volatility of the portfolio? Average variance of the individual assets. Standard deviation of the individual assets. Average covariance between all pairs of assets.

Average covariance between all pairs of assets.

The "change in polarity" principle states which of the following? Once an uptrend is broken, it becomes a downtrend. Once a resistance level is breached, it becomes a support level. The short-term moving average has crossed over the longer-term moving average.

Once a resistance level is breached, it becomes a support level.

Which of the following investment products is most likely to trade at their net asset value per share? Exchange traded funds. Open-end mutual funds. Closed-end mutual funds.

Open-end mutual funds.

In general, which of the following institutions will most likely have a high need for liquidity and a short investment time horizon? Banks Defined-benefit pension plans Endowments

Banks

Which of the following institutions will on average have the greatest need for liquidity? Banks. Investment companies. Non-life insurance companies.

Banks.

Compared with the occurrence of fundamental developments related to a company, when do technical analysts believe that related security price movements are most likely to arise? After Before Simultaneously

Before

Information about three stocks is provided in the following table:Stock Expected Return Beta Booraem Inc. 12.85% 1.5 Heisen Inc. 11.27% 1.1 Gutmann Inc. 9.51% 0.8 If the expected market return is 9.5% and the average risk-free rate is 1.2%, according to the capital asset pricing model (CAPM) and the security market line (SML), which of the three stocks is most likely overvalued? Booraem Inc. Heisen Inc. Gutmann Inc.

Booraem Inc.

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? The second risk manager The first risk manager Both risk managers

Both risk managers

Which of the following pooled investments is most likely characterized by a few large investments? Hedge funds. Buyout funds. Venture capital funds.

Buyout funds.

The daily intraday price performance of a security over a specified period could best be analyzed with which type of chart? Line Candlestick Point and figure

Candlestick

In analyzing a price chart, high or increasing volume most likely indicates which of the following? Predicts a reversal in the price trend. Predicts that a trendless period will follow. Confirms a rising or declining trend in prices.

Confirms a rising or declining trend in prices.

Which of the following risks is best described as a financial risk? Credit Solvency Operational

Credit

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

Performance measurement

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

Performance measurement

Which of the following factors is least likely to affect an individual's ability to take risk? Expected income Personality type Time horizon

Personality type

Which of the following is a reversal pattern? Pennant. Rectangle. Double bottom.

Double bottom.

An investor evaluating the returns of three recently formed exchange-traded funds gathers the following information: ETF Time Since InceptionReturn Since Inception (%) 1 146 days 4.61 2 5 weeks 1.10 3 15 months 14.35 Q. The ETF with the highest annualized rate of return is: ETF 1. ETF 2. ETF 3.

ETF 2. he annualized rate of return for ETF 2 is 12.05% = (1.0110^(52/5)) − 1, which is greater than the annualized rate of ETF 1, 11.93% = (1.0461^(365/146)) − 1, and ETF 3, 11.32% = (1.1435^(12/15)) − 1.

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

Endowments and foundations

An analyst gathers the following information for the asset allocations of three portfolios: Portfolio Fixed Income (%) Equity (%) Alternative Assets (%) 1 25 60 15 2 60 25 15 3 15 60 25 Which of the portfolios is most likely appropriate for a client who has a high degree of risk tolerance? Portfolio 1. Portfolio 2. Portfolio 3.

Portfolio 3.

Which of the following portfolios of risky assets is most likely the global minimum-variance portfolio? Portfolio Expected Return Standard Deviation A 5% 20% B 8% 33% C 3% 20% Portfolio C Portfolio A Portfolio B

Portfolio A The global minimum-variance portfolio is the left-most point on the minimum-variance frontier among all portfolios of risky assets. Portfolios A and C have the same standard deviation, but Portfolio A dominates Portfolio C because of a higher return.

With respect to the formation of portfolios, which of the following statements is most accurate? Portfolios affect risk less than returns. Portfolios affect risk more than returns. Portfolios affect risk and returns equally.

Portfolios affect risk more than returns.

Which of the following financial products is least likely to have a capital gain distribution? Exchange traded funds. Open-end mutual funds. Closed-end mutual funds.

Exchange traded funds.

In Elliott Wave Theory, Wave 2 commonly exhibits a pattern best described as a(n): basing pattern consisting of five smaller waves. Fibonacci ratio percentage retracement composed of three smaller waves. uptrend moving above the high of Wave 1 and consisting of five smaller waves.

Fibonacci ratio percentage retracement composed of three smaller waves.

Which of the following statements on fintech's use of data as part of risk analysis is correct? Stress testing requires precise inputs and excludes qualitative data. Machine learning ensures that traditional and alternative data are fully segregated. For real-time risk monitoring, data may be aggregated for reporting and used as model inputs.

For real-time risk monitoring, data may be aggregated for reporting and used as model inputs.

Which of the following return calculating methods is best for evaluating the annualized returns of a buy-and-hold strategy of an investor who has made annual deposits to an account for each of the last five years? Geometric mean return. Arithmetic mean return. Money-weighted return.

Geometric mean return.

Which of the following is least important as a reason for a written investment policy statement (IPS)? The IPS may be required by regulation. Having a written IPS is part of best practice for a portfolio manager. Having a written IPS ensures the client's risk and return objectives can be achieved.

Having a written IPS ensures the client's risk and return objectives can be achieved.

Which of the following forms of pooled investments is subject to the least amount of regulation? Hedge funds. Exchange traded funds. Closed-end mutual funds.

Hedge funds.

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? High ability to take risk but a low willingness to take risk High ability to take risk and a high willingness to take risk Low ability to take risk but a high willingness to take risk

High ability to take risk and a high willingness to take risk

With respect to capital market theory, which of the following asset characteristics is least likely to impact the variance of an investor's equally weighted portfolio? Return on the asset. Standard deviation of the asset. Covariances of the asset with the other assets in the portfolio.

Return on the asset.

Which of the following may be controlled by an investor? Risk Raw returns Risk-adjusted returns

Risk

Which of the following best describes activities that are supported by a risk management infrastructure? Risk tolerance, budgeting, and reporting Risk tolerance, measurement, and monitoring Risk identification, measurement, and monitoring

Risk identification, measurement, and monitoring

Which of the following is the best reason for an investor to be concerned with the composition of a portfolio? Risk reduction. Downside risk protection. Avoidance of investment disasters.

Risk reduction

Which of the following institutional investors is most likely to have a low tolerance for investment risk and relatively high liquidity needs? Insurance company Defined-benefit pension plan Charitable foundation

Insurance company

A financial planner has created the following data to illustrate the application of utility theory to portfolio selection: Investment Expected Return (%) Expected Standard Deviation (%) 1 18 2 2 19 8 3 20 15 4 18 30 the measure for risk aversion has a value of 4, the risk-averse investor is most likely to choose: Investment 1. Investment 2. Investment 3.

Investment 1.

A financial planner has created the following data to illustrate the application of utility theory to portfolio selection: Investment Expected Return (%) Expected Standard Deviation (%) 1 18 2 2 19 8 3 20 15 4 18 30 the measure for risk aversion has a value of 2, the risk-averse investor is most likely to choose: Investment 1. Investment 2. Investment 3.

Investment 2.

A financial planner has created the following data to illustrate the application of utility theory to portfolio selection: Investment Expected Return (%) Expected Standard Deviation (%) 1 18 2 2 19 8 3 20 15 4 18 30 A risk-neutral investor is most likely to choose: Investment 1. Investment 2. Investment 3.

Investment 3.

A financial planner has created the following data to illustrate the application of utility theory to portfolio selection: Investment Expected Return (%) Expected Standard Deviation (%) 1 18 2 2 19 8 3 20 15 4 18 30 the measure for risk aversion has a value of −2, the risk-seeking investor is most likely to choose: Investment 2. Investment 3. Investment 4.

Investment 4.

The section of the investment policy statement (IPS) that provides information about how policy may be executed, including investment constraints, is best described as the: Investment Objectives. Investment Guidelines. Statement of Duties and Responsibilities.

Investment Guidelines.

Which of the following typical topics in an investment policy statement (IPS) is most closely linked to the client's "distinctive needs"? Procedures. Investment Guidelines. Statement of Duties and Responsibilities.

Investment Guidelines.

Which of the following institutional investors is most likely to manage investments in mutual funds? Insurance companies. Investment companies. University endowments.

Investment companies.

Which of the following is least likely an assumption of the capital asset pricing model (CAPM)? Investors are different only with respect to their unique holding periods. An investor can invest as much as he or she desires in any asset. Security prices are not affected by investor trades.

Investors are different only with respect to their unique holding periods.

Drawbacks of technical analysis include which of the following? It identifies changes in trends only after the fact. Deviations from intrinsic value can persist for long periods. It usually requires detailed knowledge of the financial instrument under analysis.

It identifies changes in trends only after the fact.

Which of the following performance measures does not require the measure to be compared to another value? Sharpe ratio. Treynor ratio. Jensen's alpha.

Jensen's alpha.

Which of the following performance measures is consistent with the CAPM? M-squared. Sharpe ratio. Jensen's alpha.

Jensen's alpha.

Which of the following performance measures is most appropriate for an investor who is not fully diversified? M-squared. Treynor ratio. Jensen's alpha.

M-squared.

Three equity fund managers have performance records summarized in the following table: Mean Annual Return (%) Standard Deviation of Return (%) Manager 1 14.38 10.53 Manager 2 9.25 6.35 Manager 3 13.10 8.23 Q. Given a risk-free rate of return of 2.60%, which manager performed best based on the Sharpe ratio? Manager 1 Manager 2 Manager 3

Manager 3

The set of portfolios on the minimum-variance frontier that dominates all sets of portfolios below the global minimum-variance portfolio is the: capital allocation line. Markowitz efficient frontier. set of optimal risky portfolios

Markowitz efficient frontier.

Which of the following pairs of risks are most closely related? Model risk and tail risk Liquidity risk and operational risk Credit risk and solvency risk

Model risk and tail risk

A fund receives investments at the beginning of each year and generates returns as shown in the table. Year of InvestmentAssets Under Management at the beginning of each year Return during Year of Investment 1 $1,000 15% 2 $4,000 14% 3 $45,000 -4% Q. Which return measure over the three-year period is negative? Geometric mean return Time-weighted rate of return Money-weighted rate of return

Money-weighted rate of return

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*? Securities A and C Securities B and C Securities A and B

Securities B and C The negative correlation of -0.5 between investment securities B and C is the lowest and thus is the most effective for portfolio *diversification*.

An analyst gathers the following information: Security Expected Annual Return (%) Expected Standard Deviation (%) Correlation between Security and the Market Security 1 11 25 0.6 Security 2 11 20 0.7 Security 3 14 20 0.8 Market 10 15 1.0 Which security has the highest total risk? Security 1. Security 2. Security 3.

Security 1.

An analyst gathers the following information: Security Expected Annual Return (%) Expected Standard Deviation (%) Correlation between Security and the Market Security 1 11 25 0.6 Security 2 11 20 0.7 Security 3 14 20 0.8 Market 10 15 1.0 Which security has the least amount of market risk? Security 1. Security 2. Security 3.

Security 2.

An analyst gathers the following information: Security Expected Annual Return (%) Expected Standard Deviation (%) Correlation between Security and the Market Security 1 11 25 0.6 Security 2 11 20 0.7 Security 3 14 20 0.8 Market 10 15 1.0 Which security has the highest beta measure? Security 1. Security 2. Security 3.

Security 3.

An analyst gathers the following information: Security Expected Standard Deviation (%) Beta Security 1 25 1.50 Security 2 15 1.40 Security 3 20 1.60 With respect to the capital asset pricing model, a decline in the expected market return will have the greatest impact on the expected return of: Security 1. Security 2. Security 3.

Security 3.

An analyst gathers the following information: Security Expected Standard Deviation (%) Beta Security 1 25 1.50 Security 2 15 1.40 Security 3 20 1.60 With respect to the capital asset pricing model, if the expected market risk premium is 6% the security with the highest expected return is: Security 1. Security 2. Security 3.

Security 3.

Which of the following is not an assumption of technical analysis? Security markets are efficient. The security under analysis is freely traded. Market trends and patterns tend to repeat themselves.

Security markets are efficient.

Which of the following is least likely to be placed in the appendices to an investment policy statement (IPS)? Rebalancing Policy. Strategic Asset Allocation. Statement of Duties and Responsibilities.

Statement of Duties and Responsibilities.

With respect to the pricing of risk in capital market theory, which of the following statements is most accurate? All risk is priced. Systematic risk is priced. Nonsystematic risk is priced.

Systematic risk is priced.

Which factor should most affect a company's ability to tolerate risk? A stable market environment The beliefs of the individual board members The ability to dynamically respond to adverse events

The ability to dynamically respond to adverse events

Which of the following errors would most likely be a result of overfitting a machine learning model? Inability to recognize relationships within the training data A predictive model that treats true parameters as if they are noise The discovery of unsubstantiated patterns that lead to prediction errors

The discovery of unsubstantiated patterns that lead to prediction errors

*Security analysis* is most likely a part of which step in the portfolio management process? The feedback step The execution step The planning step

The execution step

Which of the following is best characterized as a relative risk objective? Value at risk for the fund will not exceed US$3 million. The fund will not underperform the DAX by more than 250 basis points. The fund will not lose more than €2.5 million in the coming 12-month period.

The fund will not underperform the DAX by more than 250 basis points.

Which of the following is most likely associated with an investor's ability to take risk rather than the investor's willingness to take risk? The investor has a long investment time horizon. The investor believes earning excess returns on stocks is a matter of luck. Safety of principal is very important to the investor.

The investor has a long investment time horizon.

Investor A and Investor B invest in a fund for two years: Year 1 Year 2 Fund Return Positive Negative Portfolio Money-Weighted Rate of Return Investor A 7.5% Investor B 8.2% Given the information in the table, which of the following is least likely to be an explanation for the difference between the two money-weighted rates of return? Investor A increased the investment in the fund at the end of year 1 whereas investor B did not make any additions or withdrawals. Investor B decreased the investment in the fund at the end of year 1 whereas investor A did not make any additions or withdrawals. The investors invested different amounts at inception and afterward did not make any additions or withdrawals.

The investors invested different amounts at inception and afterward did not make any additions or withdrawals.

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

The minimum investment required to open a SMA is lower than that of a mutual fund.

In constructing a chart, using a logarithmic scale on the vertical axis is likely to be most useful for which of the following applications? The price of gold for the past 100 years. The share price of a company over the past month. Yields on 10-year US Treasuries for the past 5 years.

The price of gold for the past 100 years.

Which of the following events is most likely an example of nonsystematic risk? A decline in interest rates. The resignation of chief executive officer. An increase in the value of the US dollar.

The resignation of chief executive officer.

Based on the decennial pattern of cycles, how would the return of the Dow Jones Industrial Average (DJIA) in the year 2015 compare with the return in 2020? The return would be better. The return would be worse. The answer cannot be determined because the theory does not apply to both of those years.

The return would be better.

What is a major problem with long-term cycle theories? The sample size is small. The data are usually hard to observe. They occur over such a long period that they are difficult to discern.

The sample size is small.

According to the US presidential cycle theory, the DJIA has the best performance during which year? The presidential election year itself. The first year following a presidential election. The third year following a presidential election.

The third year following a presidential election.

What is a distributed ledger technology (DLT) application suited for *physical assets*? Tokenization Cryptocurrencies Permissioned networks

Tokenization

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

Treynor ratio

Which of the following is a continuation pattern? Triangle. Triple top. Head and shoulders.

Triangle

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? Long-term bonds US Treasury bills Exchange-listed equities

US Treasury bills

Which of the following institutional investors will most likely have the longest time horizon? Defined benefit plan. University endowment. Life insurance company.

University endowment.

Why is technical analysis especially useful in the analysis of commodities and currencies? Valuation models cannot be used to determine fundamental intrinsic value for these securities. Government regulators are more likely to intervene in these markets. These types of securities display clearer trends than equities and bonds do.

Valuation models cannot be used to determine fundamental intrinsic value for these securities.

Which of the following is generally true of the head and shoulders pattern? Volume is important in interpreting the data. The neckline, once breached, becomes a support level. Head and shoulders patterns are generally followed by an uptrend in the security's price.

Volume is important in interpreting the data.

In preparing an investment policy statement, which of the following is most difficult to *quantify*? Time horizon. Ability to accept risk. Willingness to accept risk.

Willingness to accept risk.

A portfolio with equal parts invested in a risk-free asset and a risky portfolio will most likely lie on: the efficient frontier. a capital allocation line. the security market line.

a capital allocation line.

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 lower level of risk and return. a higher level of risk and return. the same level of risk and return.

a higher level of risk and return.

Bollinger Bands are constructed by plotting: a MACD line and a signal line. a moving-average line with an uptrend line above and downtrend line below. a moving-average line with upper and lower lines that are at a set number of standard deviations apart.

a moving-average line with upper and lower lines that are at a set number of standard deviations apart.

Liquidity risk is most associated with: the probability of default. a widening bid-ask spread. a poorly functioning market.

a widening bid-ask spread.

An investment policy statement's risk objective states that over a 12-month period, with a probability of 95%, the client's portfolio must not lose more than 5% of its value. This statement is most likely a(n): total risk objective. relative risk objective. absolute risk objective.

absolute risk objective.

Risk management is most likely the process by which an organization: minimizes its exposure to potential losses. adjusts its risk to a predetermined level. maximizes its risk-adjusted return.

adjusts its risk to a predetermined level.

The computerized buying and selling of financial instruments, in accordance with pre-specified rules and guidelines, is best described as: a dark pool. robo-advising. algorithmic trading.

algorithmic trading.

Once an enterprise's risk tolerance is determined, the role of risk management is to: analyze risk drivers. align risk exposures with risk appetite. identify the extent to which the enterprise is willing to fail in meeting its objectives.

align risk exposures with risk appetite.

Risk governance: aligns risk management activities with the goals of the overall enterprise. defines the qualitative assessment and evaluation of potential sources of risk in an organization. delegates responsibility for risk management to all levels of the organization's hierarchy.

aligns risk management activities with the goals of the overall enterprise.

The intercept of the best fit line formed by plotting the excess returns of a manager's portfolio on the excess returns of the market is best described as Jensen's: beta. ratio. alpha.

alpha.

With respect to return-generating models, the intercept term of the market model is the asset's estimated: beta. alpha. variance.

alpha. Ri = αi + βiRm + ei, the intercept, αi, and slope coefficient, βi, are estimated using historical security and market returns.

An example of risk transfer combined with *self-insurance* is most likely: a bond portfolio hedged with an interest rate option. an insurance policy with a deductible. a bank that establishes a loan loss reserve fund.

an insurance policy with a deductible.

A technical analyst has detected a price chart pattern with three segments. The left segment shows a decline followed by a reversal to the starting price level. The middle segment shows a more pronounced decline than in the first segment and again a reversal to near the starting price level. The third segment is roughly a mirror image of the first segment. This chart pattern is most accurately described as: a triple bottom. an inverse head and shoulders. a head and shoulders.

an inverse head and shoulders.

Within a risk management framework, risk tolerance: and risk exposure should be kept in alignment. includes the qualitative assessment and evaluation of risk. is determined as a result of establishing how and where risk is taken.

and risk exposure should be kept in alignment.

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

annualized return.

A firm's risk management committee would be expected to do all of the following except: approving the governing body's proposed risk policies. deliberating the governing body's risk policies at the operational level. providing top decision-makers with a forum for considering risk management issues.

approving the governing body's proposed risk policies.

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

asset allocation.

With respect to the capital asset pricing model, the primary determinant of expected return of an individual asset is the: asset's beta. market risk premium. asset's standard deviation.

asset's beta.

The slope of the security characteristic line is an asset's: beta. excess return. risk premium.

beta.

An optimal risky portfolio has an expected return of 15% and standard deviation of 20%. The risk-free rate is currently 5%. A risk-seeking investor who is considering investing along the capital allocation line (CAL) would most likely: borrow 25% of her wealth at the risk-free rate and invest 125% in the optimal risky portfolio. invest 100% of her wealth in the optimal risky portfolio. lend 100% of her wealth at the risk-free rate.

borrow 25% of her wealth at the risk-free rate and invest 125% in the optimal risky portfolio.

Compared to the efficient frontier of risky assets, the dominant capital allocation line has higher rates of return for levels of risk greater than the optimal risky portfolio because of the investor's ability to: lend at the risk-free rate. borrow at the risk-free rate. purchase the risk-free asset.

borrow at the risk-free rate.

An investor whose portfolio lies to the right of the market portfolio on the capital market line (CML) has most likely: borrowed funds at the risk-free rate and invested all available funds in the market portfolio. invested all available funds in the risk-free asset. loaned some funds at the risk-free rate and invested the remaining funds in the market portfolio.

borrowed funds at the risk-free rate and invested all available funds in the market portfolio.

A portfolio on the capital market line with returns greater than the returns on the market portfolio represents a(n): lending portfolio. borrowing portfolio. unachievable portfolio.

borrowing portfolio.

With respect to trading costs, liquidity is least likely to impact the: stock price. bid-ask spreads. brokerage commissions.

brokerage commissions.

Mutual funds that hold high cash positions are most likely viewed by technical analysts as being: neutral. bearish. bullish.

bullish.

The time-weighted rate of return: results in a lower return when compared with the money-weighted rate of return. is affected by the amount and timing of cash flows to and from a portfolio. calculates multi-period cash flows mirroring a portfolio's compound growth rate.

calculates multi-period cash flows mirroring a portfolio's compound growth rate.

Risk budgeting most likely: limits the cost of hedging a portfolio. can be defined by a measure such as beta or scenario loss. focuses on the appetite for risk and what exposures are acceptable.

can be defined by a measure such as beta or scenario loss.

The line depicting the total risk and expected return of portfolio combinations of a risk-free asset and any risky asset is the: security market line. capital allocation line. security characteristic line.

capital allocation line.

Among other things, an organization's risk tolerance should most likely reflect its: perception of market stability. size. competitive position.

competitive position.

A portfolio engages in an investment strategy that relies on a particular element of the tax code to produce superior after-tax returns for high-net-worth individuals. Because of this strategy, the portfolio most likely faces a high level of: compliance risk. model risk. legal risk.

compliance risk.

A benefit of risk budgeting is that it: considers risk tradeoffs. establishes a firm's risk tolerance. reduces uncertainty facing the firm.

considers risk tradeoffs.

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: increase. remain the same. decrease.

decrease

As the number of assets in an equally-weighted portfolio increases, the contribution of each individual asset's variance to the volatility of the portfolio: increases. decreases. remains the same.

decreases

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): endowment. defined-contribution pension plan. defined-benefit pension plan.

defined-benefit pension plan.

Risk management is a process that can most likely be best described as: minimizing risks while attempting to maximize returns. forecasting the level of risk that can meet a defined required return. defining a level of risk to be taken with the goal of maximizing the portfolio's value.

defining a level of risk to be taken with the goal of maximizing the portfolio's value.

he process of risk management includes: minimizing risk. maximizing returns. defining and measuring risks being taken.

defining and measuring risks being taken.

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

derive a lower utility from the portfolio.

Risk budgeting includes all of the following except: determining the target return. quantifying tolerable risk by specific metrics. allocating a portfolio by some risk characteristics of the investments.

determining the target return.

All else held constant, a lower correlation between the assets in a portfolio most likely results in higher: diversification. volatility. portfolio return.

diversification.

Which of the following statements best describes a potential concern for clients using robo-advisers? Robo-advisers: must be established as registered investment advisers. do not seem to incorporate the full range of investment information into their recommendations. are likely to be held to a similar code of conduct as other investment professionals in the given region.

do not seem to incorporate the full range of investment information into their recommendations.

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: does not exceed its diversification effect. equals its diversification effect. exceeds its diversification effect.

does not exceed its diversification effect.

Text Analytics is appropriate for application to: economic trend analysis. large, structured datasets. public but not private information.

economic trend analysis.

Which of the following is most likely a feature of a defined-contribution pension plan? The employer accepts the investment risk. employer provides a specified retirement benefit. employee accepts the investment risk.

employee accepts the investment risk.

With respect to capital market theory, the average beta of all assets in the market is: less than 1.0. equal to 1.0. greater than 1.0.

equal to 1.0.

With respect to the capital asset pricing model, the market risk premium is: less than the excess market return. equal to the excess market return. greater than the excess market return.

equal to the excess market return.

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

equal to the weighted average of the risk of the two assets in the portfolio.

An organization choosing to accept a risk exposure may: buy insurance. enter into a derivative contract. establish a reserve fund to cover losses.

establish a reserve fund to cover losses.

With respect to the portfolio management process, asset allocation decisions are most likely made in the: execution step. planning step. feedback step.

execution step.

With respect to the portfolio management process, the asset allocation is determined in the: planning step. feedback step. execution step.

execution step.

With respect to return-generating models, which of the following statements is most accurate? Return-generating models are used to directly estimate the: expected return of a security. weights of securities in a portfolio. parameters of the capital market line.

expected return of a security.

Returns on asset classes are best described as being a function of: the failure of arbitrage. exposure to the idiosyncratic risks of those asset classes. exposure to sets of systematic factors relevant to those asset classes.

exposure to sets of systematic factors relevant to those asset classes.

With respect to the portfolio management process, the rebalancing of a portfolio's composition is most likely to occur in the: planning step. feedback step. execution step.

feedback step.

The execution step of the portfolio management process includes: preparing the investment policy statement. finalizing the asset allocation. monitoring the portfolio performance.

finalizing the asset allocation.

A major benefit of employing a risk budgeting process is that it most likely: allows the organization to determine its enterprise risk tolerance. forces risk tradeoffs across the organization. eliminates the need for hedging within the organization.

forces risk *tradeoffs* across the organization.

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: market factor model. fundamental factor model. macroeconomic factor model.

fundamental factor model.

Technical analysts most likely study trends and patterns in security prices to *forecast* a company's: future price trends. earnings potential. intrinsic value.

future price trends.

The timing of payouts for property and casualty insurers is unpredictable ("lumpy") in comparison with the timing of payouts for life insurance companies. Therefore, in general, property and casualty insurers have: lower liquidity needs than life insurance companies. greater liquidity needs than life insurance companies. a higher return objective than life insurance companies.

greater liquidity needs than life insurance companies.

With respect to utility theory, the most risk-averse investor will have an indifference curve with the: most convexity. smallest intercept value. greatest slope coefficient.

greatest slope coefficient.

A candlestick chart is similar to a bar chart except that the candlestick chart: represents upward movements in price with X's. also graphically shows the range of the period's highs and lows. has a body that is light or dark depending on whether the security closed higher or lower than its open.

has a body that is light or dark depending on whether the security closed higher or lower than its open.

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

have assets that are owned directly by the individual.

With respect to capital market theory, which of the following assumptions allows for the existence of the market portfolio? All investors: are price takers. have homogeneous expectations. plan for the same, single holding period.

have homogeneous expectations.

After interviewing a client in order to prepare a written investment policy statement (IPS), you have established the following: The client has earnings that have exceeded €120,000 (pre-tax) each year for the past five years. She has no dependents. The client's subsistence needs are approximately €45,000 per year. The client states that she feels uncomfortable with her lack of understanding of securities markets. All of the client's current savings are invested in short-term securities guaranteed by an agency of her national government. The client's responses to a standard risk assessment questionnaire suggest she has low risk tolerance. The client is best described as having a: low ability to take risk, but a high willingness to take risk. high ability to take risk, but a low willingness to take risk. high ability to take risk and a high willingness to take risk.

high ability to take risk, but a low willingness to take risk.

A daily bar chart provides: a logarithmically scaled horizontal axis. a horizontal axis that represents changes in price. high and low prices during the day and the day's opening and closing prices.

high and low prices during the day and the day's opening and closing prices.

In defining asset classes as part of the strategic asset allocation decision, pairwise correlations within asset classes should generally be: equal to correlations among asset classes. lower than correlations among asset classes. higher than correlations among asset classes.

higher than correlations among asset classes.

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: the same as the expected return of Stock Y. lower than the expected return of Stock Y. higher than the expected return of Stock Y.

higher than the expected return of Stock Y.

Portfolio managers, who are maximizing risk-adjusted returns, will seek to invest less in securities with: lower values for nonsystematic variance. values of nonsystematic variance equal to 0. higher values for nonsystematic variance.

higher values for nonsystematic variance.

Portfolio managers who are maximizing risk-adjusted returns will seek to invest more in securities with: lower values of Jensen's alpha. values of Jensen's alpha equal to 0. higher values of Jensen's alpha.

higher values of Jensen's alpha.

Which of the following statements is least accurate? The efficient frontier is the set of all attainable risky assets with the: highest expected return for a given level of risk. lowest amount of risk for a given level of return. highest expected return relative to the risk-free rate.

highest expected return relative to the risk-free rate.

In 1938, R. N. Elliott proposed a theory that equity markets move: in stochastic waves. in cycles following Fibonacci ratios. in waves dependent on other securities.

in cycles following Fibonacci ratios.

A defined benefit plan with a large number of retirees is likely to have a high need for income. liquidity. insurance.

income.

The correlation between assets in a two-asset portfolio increases during a market decline. If there is no change in the proportion of each asset held in the portfolio or the expected standard deviation of the individual assets, the volatility of the portfolio is most likely to: increase. decrease. remain the same.

increase

With respect to capital market theory, an investor's optimal portfolio is the combination of a risk-free asset and a risky asset with the highest: expected return. indifference curve. capital allocation line slope.

indifference curve.

An analyst creating a dataset composed largely of product reviews would most likely classify the data sources as generated by: sensors. individuals. business processes.

individuals.

A correct description of fintech is that it: is driven by rapid growth in data and related technological advances. increases the need for intermediaries. is at its most advanced state using systems that follow specified rules and instructions.

is driven by rapid growth in data and related technological advances.

With respect to capital market theory, the optimal risky portfolio: is the market portfolio. has the highest expected return. has the lowest expected variance.

is the market portfolio.

A good risk management framework: is a top-down process and guidance directing risk management activities. seeks to prioritize avoidance of financial loss over defining policies and processes. is typically a process that addresses a common set of factors within different organizations.

is typically a process that addresses a common set of factors within different organizations.

A characteristic of Big Data is that: one of its traditional sources is business processes. it involves formats with diverse types of structures. real-time communication of it is uncommon due to vast content.

it involves formats with diverse types of structures.

A written investment policy statement (IPS) is most likely to succeed if: it is created by a software program to assure consistent quality. it is a collaborative effort of the client and the portfolio manager. it reflects the investment philosophy of the portfolio manager.

it is a collaborative effort of the client and the portfolio manager.

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

lead to investment in assets with the highest return per unit of risk.

When analyzing a head and shoulders pattern that represents the reversal of an upward trend, the highest trading volume is most likely on the upward side of the: right shoulder. head. left shoulder.

left shoulder.

With respect to the capital market line, a portfolio on the CML with returns less than the returns on the market portfolio represents a(n): lending portfolio. borrowing portfolio. unachievable portfolio.

lending portfolio

At the beginning of Year 1, a fund has $10 million under management; it earns a return of 14% for the year. The fund attracts another $100 million at the start of Year 2 and earns a return of 8% for that year. The money-weighted rate of return is most likely: less than the time-weighted rate of return. the same as the time-weighted rate of return. greater than the time-weighted rate of return.

less than the time-weighted rate of return. MWRR: CF0 = −10CF1 = −100CF2 = +120.31 TWRR: (1.14)(1.08)^0.5 −1 = 10.96%.

A client who is a 34-year old widow with two healthy young children (aged 5 and 7) has asked you to help her form an investment policy statement. She has been employed as an administrative assistant in a bureau of her national government for the previous 12 years. She has two primary financial goals—her retirement and providing for the college education of her children. This client's time horizon is best described as being: long term. short term. medium term.

long term.

After interviewing a client in order to prepare a written investment policy statement (IPS), you have established the following: The client has earnings that vary dramatically between £30,000 and £70,000 (pre-tax) depending on weather patterns in Britain. In three of the previous five years, the after-tax income of the client has been less than £20,000. The client's mother is dependent on her son (the client) for approximately £9,000 per year support. The client's own subsistence needs are approximately £12,000 per year. The client has more than 10 years' experience trading investments including commodity futures, stock options, and selling stock short. The client's responses to a standard risk assessment questionnaire suggest he has above average risk tolerance. The client is best described as having a: low ability to take risk, but a high willingness to take risk. high ability to take risk, but a low willingness to take risk. high ability to take risk and a high willingness to take risk.

low ability to take risk, but a high willingness to take risk.

In a strategic asset allocation, assets within a specific asset class are least likely to have: low paired correlations. low correlations with other asset classes. similar risk and return expectations.

low paired correlations.

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

lower expected return.

Consider the investment in the following table: Start of Year 1 One share purchased at $100 End of Year 1 $5.00 dividend/share paid and one additional share purchased at $125 End of Year 2 $5.00 dividend/share paid and both shares sold for $140 per share Assuming dividends are not reinvested, compared with the time-weighted return, the money-weighted return is: lower. the same. higher.

lower.

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

market risk premium.

The slope of the security market line (SML) represents the portion of an asset's expected return attributable to: diversifiable risk. market risk. total risk.

market risk.

Risk management in the case of individuals is best described as concerned with: hedging risk exposures. maximizing utility while bearing a tolerable level of risk. maximizing utility while avoiding exposure to undesirable risks.

maximizing utility while bearing a tolerable level of risk.

ABC Fund invests in Singapore's government debt with maturities up to three months. It is most likely classified as a: fixed-income arbitrage fund. money market fund. bond mutual fund.

money market fund.

In recent periods, an investor has made several additions to and withdrawals from her portfolio. The measure that is most appropriate for measuring her investment performance is the: holding period return. money-weighted rate of return. time-weighted rate of return.

money-weighted rate of return.

The factors a risk management framework should address include all of the following except: communications. policies and processes. names of responsible individuals.

names of responsible individuals.

An analyst observes that stock markets usually demonstrate return distributions concentrated to the right with a higher frequency of negative deviation from the mean. This feature is most likely known as: positive skewness. negative skewness. kurtosis.

negative skewness.

Risk that can be attributed to factor(s) that affect a company or industry is best described as: non-systematic risk. market risk. systematic risk.

non-systematic risk.

In providing investment services, robo-advisers are most likely to: rely on their cost effectiveness to pursue active strategies. offer fairly conservative advice as easily accessible guidance. be free from regulation when acting as fully-automated wealth managers.

offer fairly conservative advice as easily accessible guidance.

Two individual investors with different levels of risk aversion will have optimal portfolios that are: below the capital allocation line. on the capital allocation line. above the capital allocation line.

on the capital allocation line

The dominant capital allocation line is the combination of the risk-free asset and the: optimal risky portfolio. levered portfolio of risky assets. global minimum-variance portfolio.

optimal risky portfolio.

The relative strength index for a stock stands at 75. This reading is best described as an indication that the stock is neutral. oversold. overbought.

overbought.

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: overvalued. correctly valued. undervalued.

overvalued.

Evidence of risk aversion is best illustrated by a risk-return relationship that is: negative. neutral. positive.

positive.

All of the following are names of Elliott cycles except: presidential. supercycle. grand supercycle.

presidential

Technical analysis relies most importantly on: price and volume data. accurate financial statements. fundamental analysis to confirm conclusions.

price and volume data.

It is most likely that the distance between the outer bands of Bollinger Bands will be farthest apart when the moving average period is longer. trading volume is higher. price volatility is higher.

price volatility is higher.

A good risk governance process would most likely: provide guidance on the size of the largest acceptable loss for the organization. provide different risk targets for each unit within the organization. be a bottom-up process that reflects the current risk exposures of all parts of the organization.

provide guidance on the size of the largest acceptable loss for the organization.

A trader determines that a stock price formed a pattern with a horizontal trendline that connects the high prices and a trendline with positive slope that connects the low prices. Given the pattern formed by the stock price, the trader will most likely: purchase the stock because the pattern indicates a bullish signal. sell the stock because the pattern indicates a bearish signal. avoid trading the stock because the pattern indicates a sideways trend.

purchase the stock because the pattern indicates a bullish signal.

Investors should use a portfolio approach to: reduce risk. monitor risk. eliminate risk.

reduce risk.

An investment policy statement that includes a return objective of outperforming the FTSE 100 by 120 basis points is best characterized as having a(n): relative return objective. absolute return objective. arbitrage-based return objective.

relative return objective. FTSE 100 is benchmark

The process of looking for inflection points in one market that may signal a trend change in a *related market* is best described as: capital market cycle analysis. relative strength analysis. momentum analysis.

relative strength analysis.

To identify intermarket relationships, technicians commonly use: stochastic oscillators. Fibonacci ratios. relative strength analysis.

relative strength analysis.

A price range in which selling is sufficient to stop the rise in price is best described as: change in polarity. resistance. support.

resistance

A top-down process that offers guidance and directs activities that seek to maximize the value of an enterprise is most likely an element of: risk governance. risk infrastructure. risk monitoring and mitigation.

risk governance.

With respect to the mean-variance theory, the optimal portfolio is determined by each individual investor's: risk-free rate. borrowing rate. risk preference.

risk preference.

Which of the following is the correct sequence of events for risk governance and management that focuses on the entire enterprise? Establishing: risk tolerance, then risk budgeting, and then risk exposures. risk exposures, then risk tolerance, and then risk budgeting. risk budgeting, then risk exposures, and then risk tolerance.

risk tolerance, then risk budgeting, and then risk exposures.

Highly risk-averse investors will most likely invest the majority of their wealth in: risky assets. risk-free assets. the optimal risky portfolio.

risk-free assets.

Which of the following statements most accurately defines the market portfolio in capital market theory? The market portfolio consists of all: risky assets. tradable assets. investable assets.

risky assets.

With respect to the mean-variance portfolio theory, the capital allocation line, CAL, is the combination of the risk-free asset and a portfolio of all: risky assets. equity securities. feasible investments.

risky assets.

The planning step of the portfolio management process is least likely to include an assessment of the client's securities. constraints. risk tolerance.

securities.

The graph of the capital asset pricing model is the: capital market line. security market line. security characteristic line.

security market line.

With respect to capital market theory, correctly priced individual assets can be plotted on the: capital market line. security market line. capital allocation line.

security market line.

An investment has a 50% probability of returning 12% and a 50% probability of returning 6%. An investor prefers this uncertain investment over a guaranteed return of 10%. This preference most likely indicates that the investor is risk: seeking. averse. neutral.

seeking.

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: seeking. averse. neutral.

seeking.

Effcient frontier, a set increase in risk is most likely to lead to: sequentially smaller increases in expected return. consistent increases in expected return. sequentially larger increases in expected return.

sequentially smaller increases in expected return.

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

setting the risk tolerance of the organization. CEO and board remain responsible for determining the risk tolerance of the organization as a whole.

An example of a non-financial risk is: market risk. liquidity risk. settlement risk.

settlement risk.

A client who is a director of a publicly listed corporation is required by law to refrain from trading that company's stock at certain points of the year when disclosure of financial results are pending. In preparing a written investment policy statement (IPS) for this client, this restriction on trading: is irrelevant to the IPS. should be included in the IPS. makes it illegal for the portfolio manager to work with this client.

should be included in the IPS.

Technical analysts following Elliott Wave Theory most likely use Fibonacci numbers to determine the expected: size of future waves in a market trend. correlation between waves and technical indicators. number of waves in a grand supercycle.

size of future waves in a market trend.

Effective risk governance in an enterprise provides guidance on all of the following except: unacceptable risks. worst losses that may be tolerated. specific methods to mitigate risk for each subsidiary in the enterprise.

specific methods to mitigate risk for each subsidiary in the enterprise.

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

standard deviation.

An analyst uses a multi-factor model to estimate the expected returns of various securities. The model analyzes historical and cross-sectional return data to identify factors that explain the variance or covariance in the securities' observed returns. This model is most likely a: statistical factor model. macroeconomic factor model. fundamental factor model.

statistical factor model.

The chart above depicts the relative strength lines for a stock index versus both a bond index and gold. In the month of June, it would be most appropriate for an analyst using intermarket analysis to move investments from: gold to stocks. stocks to bonds. bonds to gold.

stocks to bonds.

A benefit of distributed ledger technology (DLT) favoring its use by the investment industry is its: scalability of underlying systems. ease of integration with existing systems. streamlining of current post-trade processes.

streamlining of current post-trade processes.

The change in polarity principle most likely helps analysts determine a new: support level after a retracement to a lower high than a previous retracement. resistance level after an upward breakthrough of the trendline. support level after a resistance level is breached.

support level after a resistance level is breached.

A stock is declining in price and reaches a price range wherein buying activity is sufficient to stop the decline. This range is best described as the: change in polarity point. resistance level. support level.

support level.

With respect to return-generating models, the slope term of the market model is an estimate of the asset's: total risk. systematic risk. nonsystematic risk.

systematic risk. is an estimate of the asset's systematic or market risk.

A portfolio manager decides to temporarily invest more of a portfolio in equities than the investment policy statement prescribes because he expects equities will generate a higher return than other asset classes. This decision is most likely an example of: rebalancing. tactical asset allocation. strategic asset allocation.

tactical asset allocation.

The belief that trends and patterns tend to repeat themselves and are, therefore, somewhat predictable best describes: arbitrage pricing theory. weak-form efficiency. technical analysis.

technical analysis.

"Fintech" is best described as: technology-driven innovation in the financial service industry. the collection of large quantities of financial data from a variety of sources in multiple formats. the use of technical models to describe patterns in financial markets and make trading decisions.

technology-driven innovation in the financial service industry.

Tactical asset allocation is best described as: attempts to exploit arbitrage possibilities among asset classes. the decision to deliberately deviate from the policy portfolio. selecting asset classes with the desired exposures to sources of systematic risk in an investment portfolio

the decision to deliberately deviate from the policy portfolio.

The portfolio on the minimum-variance frontier with the lowest standard deviation is: unattainable. the optimal risky portfolio. the global minimum-variance portfolio.

the global minimum-variance portfolio.

A downtrend line is constructed by drawing a line connecting: the lows of the price chart. the highs of the price chart. the highest high to the lowest low of the price chart.

the highs of the price chart.

The capital market line (CML) is the graph of the risk and return of portfolio combinations consisting of the risk-free asset and: any risky portfolio. the market portfolio. the leveraged portfolio.

the market portfolio.

With respect to risk-averse investors, a risk-free asset will generate a numerical utility that is: the same for all individuals. positive for risk-averse investors. equal to zero for risk seeking investors.

the same for all individuals.

With respect to capital market theory, which of the following statements best describes the effect of the homogeneity assumption? Because all investors have the same economic expectations of future cash flows for all assets, investors will invest in: the same optimal risky portfolio. the Standard and Poor's 500 Index. assets with the same amount of risk.

the same optimal risky portfolio.

When a security that was in an upward trend falls 1% below its trendline, a technical analyst will most likely determine that: a downward trend is beginning. the upward trend is ending. the trendline needs an adjustment.

the trendline needs an adjustment.

A TRIN with a value of less than 1.0 indicates: the market is in balance. there is more volume in rising shares. there is more volume in declining shares.

there is more volume in rising shares.

A factor that most likely measures a client's ability to bear risk is his or her: time horizon. inclination to independent thinking. personality type.

time horizon.

A factor associated with the widespread adoption of algorithmic trading is increased: market efficiency. average trade sizes. trading destinations.

trading destinations.

In the use of machine learning (ML): some techniques are termed "black box" due to data biases. human judgment is not needed because algorithms continuously learn from data. training data can be learned too precisely, resulting in inaccurate predictions when used with different datasets.

training data can be learned too precisely, resulting in inaccurate predictions when used with different datasets

Relative to portfolios on the CML, any portfolio that plots above the CML is considered: inferior. inefficient. unachievable.

unachievable.

Analysts who have estimated returns of an asset to be greater than the expected returns generated by the capital asset pricing model should consider the asset to be: overvalued. undervalued. properly valued.

undervalued.

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: undervalued. fairly valued. overvalued.

undervalued.

The choice of risk-modification method is based on: minimizing risk at the lowest cost. maximizing returns at the lowest cost. weighing costs versus benefits in light of the organization's risk tolerance.

weighing costs versus benefits in light of the organization's risk tolerance.

Risk assessment questionnaires for investment management clients are most useful in measuring: value at risk. ability to take risk. willingness to take risk.

willingness to take risk.

In an inverted head and shoulders pattern, if the neckline is at €100, the shoulders at €90, and the head at €75, the price target is closest to which of the following? €50. €110. €125.

€125. Target = Neckline + (Neckline − Head): €100 + (€100 − €75) = €125

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? 0.5 −0.2 0.0

−0.2

With respect to the capital asset pricing model, which of the following values of beta for an asset is most likely to have an expected return for the asset that is less than the risk-free rate? −0.5 0.0 0.5

−0.5

An investor purchased 100 shares of a stock for $34.50 per share at the beginning of the quarter. If the investor sold all of the shares for $30.50 per share after receiving a $51.55 dividend payment at the end of the quarter, the holding period return is closest to: −13.0%. −11.6%. −10.1%.

−10.1%. (3,050 − 3,450 + 51.55)/3,450

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: 1.30%. −2.02%. −5.93%.

−2.02%.