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Investments & Securities
Q:
When evaluating the performance of a mutual fund holding several S&P 500 stocks, one should always use the S&P 500 as the benchmark.
Q:
Total risk of a portfolio is measured by the beta coefficient.
Q:
The time-weighted rate of return is affected by any cashflows to the portfolio.
Q:
The dollar-weighted rate of return is equivalent to the internal rate of return.
Q:
Standard deviation, beta and coefficient of determination are readily available for mutual funds from sources like Morningstar.
Q:
GIPS presentation standards require a. a 5-year performance record, or since inception if the fund is less than 5-years old. b. inclusion of terminated portfolios. c. cash accounting. d. exclusion of cash and cash equivalents.
Q:
The --------------------- has issued minimum standards for investment performance.FINRA, formerly known as the National Association of Security DealersSecurities Exchange Commission (SEC)Association for Security Analysts and Portfolio ManagersChartered Financial Analyst Institute, formerly known as the Association for Investment Management and Research
Q:
One problem with style analysis is style:
a. consistency.
b. comparability.
c. correctness.
d. character.
Q:
One approach to style analysis which uses the stocks in a portfolio to describe the fund's allocation among asset classes is known as:
a. returns-based style analysis.
b. asset allocation style analysis.
c. holdings-based style analysis.
d. mix-based style analysis.
Q:
Which of the following is true regarding Modigliani-squared?
a. It compares Treasury bills to the S&P 500 Index.
b. It states its results in both percentage and graphical form.
c. It equates the volatility of a portfolio with the market.
d. It compares fixed income securities with equities securities.
Q:
Under Jensen's differential return approach to portfolio evaluation, superior market timing is exhibited by a a. statistically significant positive alpha. b. statistically significant negative alpha. c. zero alpha. d. low positive alpha.
Q:
The reward-to-volatility ratio measures the excess return per unit of
a. total risk.
b. systematic risk.
c. market risk.
d. systemic risk.
Q:
Select the CORRECT statement about the reward-to-variability ratio (RVAR).
a. RVAR is an absolute measure of performance.
b. RVAR measures the slope of the line from RF to the portfolio being evaluated.
c. The closer the RVAR to 0.0, the better is the performance.
d. RVAR does not take into account how well diversified a portfolio was.
Q:
Superior portfolio performance can result from
a. the ability to select undervalued securities.
b. the ability to time market turns.
c. superior selectivity or timing performance.
d. neither superior selection nor timing. The market is too efficient.
Q:
The following information is to be used to answer questions SD_ Beta alpha R2_ Fund 1 1.97 1.0 1.3 0.95 Fund 2 2.94 0.8 0.6* 0.80 Fund 3 3.82 1.2 -3.5 0.90 Fund 4 4.70 1.4 4.2 0.65 *Significant at the 5 percent levelWhich of these funds was least well diversified? a. Fund 1 b. Fund 2 c. Fund 3 d. Fund 4
Q:
The following information is to be used to answer questions SD_ Beta alpha R2_ Fund 1 1.97 1.0 1.3 0.95 Fund 2 2.94 0.8 0.6* 0.80 Fund 3 3.82 1.2 -3.5 0.90 Fund 4 4.70 1.4 4.2 0.65 *Significant at the 5 percent levelWhich of these funds had the highest performance as determined by Jensen's performance measure? a. Fund 1 b. Fund 2 c. Fund 3 d. Fund 4
Q:
The following information is to be used to answer questions SD_ Beta alpha R2_ Fund 1 1.97 1.0 1.3 0.95 Fund 2 2.94 0.8 0.6* 0.80 Fund 3 3.82 1.2 -3.5 0.90 Fund 4 4.70 1.4 4.2 0.65 *Significant at the 5 percent levelWhich of these four funds had the largest total risk? a. Fund 1 b. Fund 2 deviation c. Fund 3 d. Fund 4
Q:
The following information is to be used to answer questions SD_ Beta alpha R2_ Fund 1 1.97 1.0 1.3 0.95 Fund 2 2.94 0.8 0.6* 0.80 Fund 3 3.82 1.2 -3.5 0.90 Fund 4 4.70 1.4 4.2 0.65 *Significant at the 5 percent levelWhich of the funds' returns are best explained by the market's returns? a. Fund 1 b. Fund 2 c. Fund 3 d. Fund 4
Q:
The following information is to be used to answer questions SD_ Beta alpha R2_ Fund 1 1.97 1.0 1.3 0.95 Fund 2 2.94 0.8 0.6* 0.80 Fund 3 3.82 1.2 -3.5 0.90 Fund 4 4.70 1.4 4.2 0.65 *Significant at the 5 percent levelWhich of these four funds had the largest market risk? a. Fund 1 b. Fund 2 c. Fund 3 d. Fund 4
Q:
Which of the following measures uses the standard deviation, and evaluates portfolio performance on the basis of both return and diversification. a. Jensen's Alpha. b. Treynor's Reward to Volatility. c. M2. d. Sharpe Ratio.
Q:
The return on a portfolio during a particular period was 13 percent, the risk-free rate was 6 percent, the return on the market was 12 percent, and the portfolio beta was 1.2. The performance of the portfolio (according to Jensen's measure) was __________ the market.
a. inferior to
b. superior to = (13 ' 6) ' [1.2(13 ' 6)]
c. the same as = -0.2 percent
d. not compared to Negative alpha, if statistically significant, means inferior performance.
Q:
According to Jensen's differential return measure, what is alpha?
a. The intercept of the SML line
b. The intercept of the CML line
c. A means of identifying superior or inferior portfolio performance
d. The actual excess return on a portfolio during one period
Q:
Which is the better measure to estimate the performance of a well-diversified portfolio in relation to the market index?
a. Sharpe's RVAR
b. Treynor's RVOL
c. Total return (alone)
d. Portfolio beta (alone)
Q:
Which one of the following statements is true?
Notation: RVAR: Sharpe's reward-to-variability measure
RVOL: Treynor's reward-to-volatility measure
a. RVOL is based on total risk while RVAR is based on systematic risk.
b. RVAR is based on total risk while RVOL is based on systematic risk.
c. RVAR is based on unsystematic risk while RVOL is based on systematic risk.
d. RVOL is based on systematic risk while RVAR is based on unsystematic risk.
Q:
The reward-to-variability ratio measures:
a. return above the risk-free rate.
b. excess return per unit of total risk.
c. total risk per unit of excess return.
d. return above the risk-free rate relative to the risk-free rate.
Q:
The Global Investment Performance Standards (GIPS®) were created by:
a. CFA Institute, the successor to AIMR.
b. Russell/Mellon Financial, now Bank of New York Mellon Financial
c. Morningstar.
d.
Q:
If we are to assess performance carefully, we must do so on what kind of basis?
a. quarterly
b. annual
c. attribution-weighted
d. risk-adjusted
Q:
The __________ indicates the percentage of the variance in the portfolio's returns explained by the market's returns.
a. standard deviation
b. coefficient of determination
c. beta
d. alpha
Q:
The major question when evaluating the performance of a portfolio is:a. "Does the portfolio match the investor characteristics of the individual investor?"b. "Does the expected return of the portfolio meet the needs of the individual investor?"c. "Is the return on the portfolio adequate to compensate for the risk taken?"d. "Is the risk on the portfolio in line with the personal characteristics of the investor?"
Q:
Mr. Baker, a single person in early retirement, owns a house, a well-used car, and minimal life insurance. He has pension assets of about half a million dollars. He wants it all in tax-exempt municipal bonds so that "I won't lose any money, and I won't have to pay taxes." Considering the life-cycle theory of asset allocation, would you suggest any alternatives to this client?
Q:
Explain the life-cycle theory of portfolio policies.
Q:
What is difference between strategic asset allocation and tactical asset allocation?
Q:
How does the prudent man rule affect asset allocation?
Q:
Give an example of how individual investors' preferences are taken into account by institutional investors?
Q:
What are some of the differences between individual investors and institutional investors?
Q:
What is the portfolio management process outlined by Maginn and Tuttle.
Q:
Portfolio performance evaluation is an important determinant of your success in financial planning.
Q:
In today's world, investor's time horizons have lengthened.
Q:
Rebalancing is Difficult for many investors because it represents a contrarian strategy.
Q:
The spending phase of the life cycle is avoided by investors who follow the prudent man rule.
Q:
Under the life cycle approach, the lowest risk and lowest return should come during the spending and gifting stages.
Q:
The consolidation phase of the life cycle begins when the investor reaches retirement.
Q:
An efficient set of portfolios offers maximum risk for any level of return.
Q:
Retirees would likely have a greater percentage of their wealth in common stock than would a recent college graduate.
Q:
Common stocks are not always an inflationary hedge, but have a long history of strong performance over time.
Q:
Financial plans should be monitored and updated on an ongoing basis. Examples of changes that can necessitate financial plan updating include changes in wealth, time horizon, liquidity requirements, tax circumstances, and regulations.
Q:
The geometric mean for the S&P 500 for the period 1920-2005 was between 15 and 20 percent.
Q:
Pension funds are governed by the prudent man rule since specific pension fund legislation has never passed.
Q:
In order to arrive at an investment policy, it is necessary to determine whether the market is headed for a bull or bear market.
Q:
Retirement programs offer tax sheltering for individual U.S. investors.
Q:
The Prudent Man Rule, which applies to fiduciaries, is a relatively new concept in investment management.
Q:
Monitoring and revision are part of the Maginn et al. (2007) portfolio management process.
Q:
To avoid problems of underperformance, passive investing through the use of indexed mutual funds and ETFs is generally the way to go for most individuals.
Q:
The "lockup" problem involved in rebalancing refers to the:
a. problem that investors face in retirement accounts that cannot be liquidated prior to retirement.
b. trust accounts that are not managed by the investor and cannot be traded without incurring administrative costs.
c. taxable accounts subject to capital gains taxes if investments are traded.
d. problem of fixed-income securities that have little liquidity and therefore, must be held till maturity.
Q:
Monitoring and rebalancing a portfolio over time involves all of the following costs EXCEPT
a. commissions.
b. possible impact on market price.
c. holding a portfolio that is no longer adequately diversified.
d. time involved in decision making.
Q:
Investor expectations about expected returns from various asset classes should start with:
a. historic rates of return of those asset classes, from sources such as Morningstar/Ibbotson & Associates.
b. economic forecasts
c. inflation.
d. taxes.
Q:
Which type of portfolio allocation is usually done routinely?integrated asset allocationstrategic asset allocationtactical asset allocationcommand asset allocation
Q:
Strategic asset allocation is usually done:
a. once every few years, establishing a long-run or strategic asset mix.
b. using Monte Carlo simulation to identify a range of outcomes for various
asset mixes.
c. the life-cycle concept.
d. a market timing strategy.
Q:
A market timing approach that increases the proportion of funds in stocks when the stock market is expected to be rising, and increases cash when the stock market is expected to be falling is a:
a. strategic asset allocation.
b. tactical asset allocation.
c. portfolio optimization.
d. liquidity expectation timing.
Q:
The Markowitz model identifies the efficient set of portfolios, which offers the
a. highest return for any given level of risk or the lowest risk for any given level of return.
b. least-risk portfolio for a conservative, middle-aged investor.
c. long-run approach to wealth accumulation for a young investor.
d. risk-free alternative for risk-averse investors.
Q:
An aggressive asset allocation would contain larger proportions of __________ than a conservative allocation.
a. cash and bonds
b. bonds and large-cap stocks
c. small-cap and international stocks
d. bonds
Q:
The annual average compound rate of return for stocks from the period 1926-2007 was:
a. 8.50%
b. 9.55%
c. 10.05%
d. 12%
Q:
Conservative retirees likely have ____ than they did early in their careers.
a. more small-cap stocks
b. more international stocks
c. fewer bonds
d. more bonds
Q:
The life-cycle theory of asset allocation proposes that as investors progress through life, their
a. asset allocation will tend to become more conservative.
b. earnings increase in their 20s, reach a peak at about age 45, then decline.
c. assets must grow geometrically in order to achieve reasonable goals.
d. asset allocation should remain fixed in order to avoid short-sighted adjustments.
Q:
Which of the following is NOT a major consideration in the asset allocation process?
a. Return requirements
b. Risk tolerance
c. Ease of monitoring progress
d. Time horizon
Q:
__________ is the most important investment decision because it determines the risk-return characteristics of the portfolio and determines as much as 98% of the performance of a portfolio.
a. Hedging
b. Market timing
c. Performance measurement
d. Asset allocation
Q:
One aspect of the tax considerations in asset allocation is that
a. capital gains are often taxed at a higher rate than income.
b. current income is seldom a significant consideration for an investor in the
spending phase of the life cycle.
c. investors are exempt from taxes on capital gains once they reach age 65.
d. taxes on capital gains are deferred until the gain is realized.
Q:
_____ governs employer-sponsored retirement plans.:
a. Investors Advisors Act.
b. Investment Company Act.
c. Security Investors Protection Act.
d. Employment Retirement Income Security Act.
Q:
Portfolio objectives are always going to center on _______and_______, because these are the two aspects of most interest to investors.
a. accumulation; consolidation.
b. return; taxes.
c. return; risk.
d. spending; gifting.
Q:
Living expenses are covered from accumulated assets rather than from earned income in the __________ phase of the life cycle.
a. accumulation
b. consolidation
c. spending
d. gifting
Q:
Which of the following is not among the usual constraints and preferences considered when formulating an investment policy?
a. Avoidance of so-called "sin" stocks (alcohol, tobacco, firearms, etc.)
b. Liquidity needs
c. Economic assessment
d. Time horizon
Q:
Investors normally assume a Moderate trade-off between risk and return in the ____ phase of the life-cycle.
a. accumulation
b. consolidation
c. spending
d. gifting
Q:
Which of the following is NOT one of the phases of the life-cycle theory of asset allocation?
a. Accumulation phase
b. Consolidation phase
c. Gifting phase
d. Retirement phase
Q:
The first step to establishing an investment policy is to state the
a. minimum investment and maximum fees.
b. SEC guidelines for prudent man investing.
c. objectives and constraints and preferences.
d. asset allocation parameters and time horizons.
Q:
Which of the following is not true regarding life-cycle approach?
a. It is most appropriate for institutions. .
b. It automatically adjusts to a more conservative position as the investor nears retirement age.
c. It is suited to 401(k) plans.
d. It can be implemented using life-cycle (also known as target-date) funds.
Q:
Which of the following is NOT part of the portfolio management process, as described by Maginn, Tuttle, McLeavy, and Pinto (2007)? a. portfolio factors are monitored.b. portfolio is rebalanced.c. portfolio is rebalanced as required.d. strategies are developed and implemented.
Q:
An investor has just sold seven contracts of June corn on the CBOT. The price per bushel is $1.64, and each contract is for 5000 bushels. The performance bond (initial margin deposit) is $2000 per contract with the maintenance margin at $1250.
(a) How much does the investor have to deposit on the investment?
(b) If the prices of the futures on the three days following the short sales were: 1.60,
1.66, and 1.68 calculate the current equity on each of the next three days.
(c) If the investor closes out his position on the fourth day, what is his final gain or loss over the four days in dollars and as a percentage of investment?
Q:
Assume a portfolio manager holds $2 million (par value) of 9 percent Treasury bonds due 1994-1999. The current market price is 77, for a yield of 12 percent. Fearing a rise in interest rates over the next three months, the manager seeks to protect this position by hedging in futures.
(a) If T-bond futures are available at 67, what is the gain or loss from a simple hedge of 20 contracts if the price three months later is 60?
(b) What is the gain or loss on the cash position if the bonds are priced at 68 three months hence?
(c) What is the net effect of this hedge?
Q:
Assume that an investor buys one June NYSE Composite Index Futures Contract on May 1 at a price of 72. The position is closed out after four days. The prices on the three days after purchase were 72.5, 72.1 and 72.2. The initial margin is $3500.
(a) Calculate the current equity on each of the next three days.
(b) Calculate the excess equity for those three days.
(c) Calculate the final gain or loss on this position.
Q:
Do options on futures serve any economic purpose or are they just sophisticated
games?