Portfolio Analysis -
"CAPM" stands for:
Capital Asset Pricing Model
Which of the following securities is NOT directly interest rate sensitive? A. Utility Stocks B. Corporate Bonds C. Preferred Stocks D. Growth Stocks
D. Growth Stocks
Beta is a measure of:
Market risk
Passive portfolio management is:
.managing a portfolio to meet the performance of a benchmark portfolio
Which statement is TRUE about a stock's Beta Coefficient?
Beta measures price movement of a stock relative to the market
Companies characterized by high price-earnings ratios and low dividend payout ratios are: A. blue chip companies B. mature companies C. cyclical companies D. growth companies
D. growth companies
An older female customer, in the lowest tax bracket, wants an investment that will provide asset growth for retirement. The best recommendation would be: A. Emerging markets fund B. Single stock C. Municipal bond D. Index fund
Index fund
If 26 week T-bills are yielding 5%, all common stocks are yielding 10%, and growth stocks are yielding 15%, the risk premium for investing in growth stocks is: A. 0% B. 5% C. 10% D. 15%
The best answer is C. The risk premium is the excess return achieved for investing in a specific class of assets as compared to the risk free return. The risk-free return is 5%, while growth stocks are yielding 15%. The excess return for investing in growth stocks is 10%.
The investment strategy that involves paying a lower price for a security based on the expectation that the market is mispricing the issue is:
value investing
The target allocation for a specific asset class has been set at 20% of total assets under an asset allocation scheme. The manager is permitted to reduce this percentage to 15%; and can increase it to 25%; as he or she sees fit. If this action is taken by the manager, this is termed:
. tactical asset management
A counter-cyclical stock would be described by which of the following? A. No earnings variability due to changes in economic growth B. A stock which remains unaffected in good or bad economies C. A stock price that tends to move in the same direction of the market as a whole D. A stock price that tends to move in the opposite direction of the market as a whole
A stock price that tends to move in the opposite direction of the market as a whole Counter-cyclical stocks are those whose performance runs counter to the economic cycle. In good economic times, these stocks don't do as well; in poor economic times, these stocks do very well.
A customer has an existing portfolio that is mainly invested in high quality corporate bonds for stable income. As market interest rates have dropped, the customer's income has declined and she would like to reallocate part of the portfolio to corporate bonds that offer potential growth. The best recommendation is to buy: A. convertible debentures B. equipment trust certificates C. long term zero coupon bonds D. commercial paper
A. convertible debentures
Which of the following investment portfolios is LEAST liquid? A. An aggressive growth fund B. A U.S. Government securities fund C. A money market fund D. An income fund
An aggressive growth fund
The portfolio management technique that uses a market index as a performance benchmark that the asset manager must exceed is called: A. Passive asset management B. Active asset management D. Tactical asset management
B. Active asset management
Which of the following stocks would be considered defensive? A. Automobile manufacturer B. Pharmaceutical manufacturer C. Gold mining company D. Computer software developer
B. Pharmaceutical manufacturer
Which of the investments listed below offers the greatest protection against market risk? A. Common Stocks B. Treasury Bills C. Preferred Stocks D. Treasury Bonds
B. Treasury Bills
The average dividend payout and Price / Earnings ratios for NYSE listed companies are 30% and 10X respectively. The dividend payout and Price / Earnings ratios for MCR indicate that this is a: A. growth company B. mature company C. cyclical company D. deteriorating company
B. mature company Growth companies are characterized by high P-E ratios and very low dividend payout ratios. Mature companies trade at lower P-E ratios and pay out a reasonable proportion of the earnings as dividends. MCR's P-E ratio is close to the market average of 10, and its dividend payout ratio averages about 24% - slightly lower than the NYSE average. This is a mature company.
Which of the following best describes a stock that does not move with the market? A. Income stock B. Special situations stock C. Defensive stock D. Blue Chip stock
C. Defensive stock
Which of the following is NOT considered to be a cyclical stock? A. Home appliance manufacturer B. Automobile manufacturer C. Natural gas producer D. Home builder
C. Natural gas producer Natural gas production and consumption in homes and factories is fairly constant and is not cyclical. Durable goods manufacturers and home builders are in notoriously cyclical industries - these are deferrable purchases in bad times.
Common shares of which of the following issuers are likely to have a Beta coefficient much lower than +1? A. Tool and die maker B. Pharmaceutical manufacturer C. Public utility D. Electronics manufacturer
C. Public utility
A trader liquidates an exchange listed stock position and invests the proceeds in an exchange listed stock index fund. The trader has reduced which risk? A. Call risk B. Inflation risk C. Liquidity risk D. Capital risk
Capital risk is simply the risk of losing money. By increasing the number of stocks in a portfolio, this risk is reduced through diversification. This is a major advantage of investing in stock index funds. Call risk does not apply to stocks
Equity securities of which issuer are the LEAST defensive? A. Defense B. Pharmaceuticals C. Grocers D. Utilities
Defense a company whose business is not affected by the business cycle, thus the company does not have earnings variability due to changes in the economic cycle. Defensive stocks include pharmaceuticals, and soft drink and beer manufacturers.
A customer holds a large portfolio of corporate bonds. The customer is worried about capital risk. Which diversification strategy would be least effective to minimize capital risk for this customer?
Diversification among differing coupon rates
A customer holds a large portfolio of corporate bonds. The customer is worried about capital risk. Which diversification strategy would be least effective to minimize capital risk for this customer?
Diversification among differing denominations
The market theory that states that technical and fundamental analysis is of no use in selecting stocks for a portfolio is known as the:
Efficient market theory
A young couple in a low tax bracket have 2 young children and they want to start saving for the kids' college education. The best recommendation would be: A. T-Bills B. Growth funds C. Municipal bond funds D. 20 year maturity municipal bonds
Growth funds
Rank the following investments from lowest to highest, for overall historical returns experienced by investors over long periods of time: I Treasury Bills II AAA Rated Corporate Bonds III Common Stocks
I Treasury Bills II AAA Rated Corporate Bonds III Common Stocks
Which of the following securities are directly interest rate sensitive? I Utility Stocks II Growth Stocks III Preferred Stocks IV Common Stocks
I Utility Stocks III Preferred Stocks
The alpha coefficient is a measure of: I stock specific risk II market risk III a stock's price relative to the market as a whole IV a stock's price relative to a specific industry
I stock specific risk IV a stock's price relative to a specific industry
Which of the following are appropriate investment strategies for a client with a 20-year time horizon? I Holding less cash II Holding more stock III Holding less bonds
I, II, III
If a portfolio manager's market sentiment is bearish, then which of the following are appropriate actions? I Cash positions will be decreased II Cash positions will be increased III Investments in stock positions will be decreased IV Investments in stock positions will be increased
II Cash positions will be increased III Investments in stock positions will be decreased
Market risk is the same as:
Market risk is the same as systematic risk. It is the risk of the market moving adversely, and one's securities positions moving with the market. This risk cannot be diversified away; but it can be hedged against.
Defensive stocks included in a portfolio's construction will minimize exposure to: A. market risk B. credit risk C. legislative risk D. marketability risk
The best answer is A. Defensive stocks are unaffected by the business cycle, so their prices do not move as much (up or down) compared to the movements of the general market. Thus, these investments reduce market risk in a portfolio.
All of the following securities are directly interest rate sensitive EXCEPT: A. common stock issued by a utility B. bonds issued by a utility C. common stock issued by a manufacturer D. preferred stock issued by a manufacturer
common stock issued by a manufacturer
An investment strategy where a higher price is paid for a stock based upon expected returns is:
growth investing
The Capital Asset Pricing Model (CAPM) would identify the most efficient investments as those with the:
highest return for the lowest level of risk assumed
A constant ratio investment plan is one which:
maintains a fixed percentage amount of a portfolio's assets in equities
The risk inherent in a portfolio that can be diversified away is known as:
non-systematic risk
A sharp rise in interest rates would have the greatest effect on the market price of: A. pharmaceutical stocks B. public utility stocks C. electronics stocks D. forest products stocks
public utility stocks
If one asset class greatly underperforms another class in an asset allocation plan, the portfolio must be: A. renegotiated B. rebalanced C. repositioned D. realigned
rebalanced
Diversification of a portfolio among asset classes:
reduces the variability of the rate of return over the investment time horizon
A retired customer that has a portfolio of blue chip stocks is looking to supplement his retirement income. An appropriate recommendation would be to: A. sell covered calls B. sell naked calls C. sell covered puts D. sell naked puts
sell covered calls
The target allocation for a specific asset class has been set at 20% of total assets under an asset allocation scheme. The manager is permitted to reduce this percentage to 15%; and can increase it to 25%; as he or she sees fit. The setting of the 20% target allocation is called:
strategic asset management
trategic portfolio management is the selection of the:
target asset allocation for each asset class selected for investment
A constant dollar investment plan requires:
that the same aggregate dollar amount be kept invested in equities
