Chapter Two Test BankChapter Two Test BankChapter Two

Valuation, Risk, Return, and Uncertainty

A1. An ordinary annuity is a _____ series of _____ cash.a. finite, constantb. finite, growingc. infinite, constantd. infinite, growing

B2. The winner of a state lottery usually receives a(n)a. ordinary annuityb. annuity duec. growing annuityd. perpetuity

B3. Using a discount rate of 8% per year, what is the present value of an ordinary annuity of $100 per year for 10 years?a. $1,000b. $671c. $887d. $557

A4. Using a discount rate of 8% per year, what is the present value of an annuity due of $100 per year with 10 payments?a. $725b. $559c. $793d. $772

D5. Using a discount rate of 8% per year (compounded quarterly), what is the present value of an ordinary annuity of $100 per year for 10 years?a. $726b. $662c. $811d. $684

C6. A perpetual cash flow stream makes its first payment of $500 in one year. Using a 7% annual discount rate and a 3% growth rate in the value of subsequent payments, what is the present value of this growing perpetuity?a. $2,000b. $20,000c. $12,500d. $125,000

B7. A perpetuity makes annual payments of $250. The perpetuity is valued using a 10% discount rate. What is the value of the perpetuity if the first payment is made immediately?a. $2,500b. $2,750c. $25,000d. $2,525

A8. The fact that most investors are risk averse means they willa. only take risks for which they are properly rewardedb. not take a riskc. not voluntarily take a riskd. not take a risk unless they know the outcome in advance

B9. Which of the following statements is true?a. Some people are risk averse and others are notb. Some people are more risk averse than othersc. Risk averse people will not take a riskd. Risk averse people are willing to settle for less return than risk neutral people

A10. Risk must involve a. a chance of lossb. an unknown probability distributionc. actual dollarsd. negative expected returns

C11. Overall variability of returns is calleda. systematic riskb. unsystematic riskc. total riskd. undiversifiable risk

B12. Risk is often measured asa. central tendency of returnsb. dispersion of returnsc. expected value of returnsd. possibility of negative returns

A13. Riskier securities have _____ returns.a. higher expectedb. lower realizedc. higher instantaneousd. lower long-term

B14. The market rewards investors for bearing _____risk.a. diversifiableb. undiversifiablec. unsystematicd. total

B15. The diminishing marginal utility of money explains whya. some stocks sell for more than othersb. most people will not take a fair betc. people view the stock market as riskyd. people tend to pay too much

C16. The text described an example of the diminishing marginal utility of money with a statement made by a _____ player.a. hockeyb. footballc. tennisd. basketball

C17. Individual investment behavior is more a function of _____ than _____.a. risk, expected return b. expected return, utilityc. utility, expected returnd. expected return, risk

B18. The St. Petersburg paradox explains whya. some stocks sell for more than othersb. most people will not take a fair betc. people view the stock market as riskyd. people tend to pay too much

A19. In economic theory, if money is not saved, it is a. consumedb. investedc. unrealizedd. deferred

D20. Wearing a Rolex watch is an example of someone gettinga. psychic returnb. utilityc. satisfactiond. all of the above

B21. Two large classes of risk area. systematic and undiversifiableb. price and conveniencec. realized and psychicd. market and intermarket

C22. Individual consumption decisions are a major factor in determininga. credit ratings of corporationsb. dividend ratesc. market interest ratesd. levels of perceived risk

B23. If a stock has a higher than average expected return, you would logically expect it isa. widely held by investorsb. riskier than averagec. in an industry with good prospectsd. a well-managed company

D24. What is the present value of a growing perpetuity with an initial cash flow of 1000 (C0), a growth rate of 3% per year (g), and a required rate of return of 8% (R)?a. $7777.64b. $12,500c. $20,000d. $20,600

C25. Most investors would not be interested in a fair bet becausea. they would be concerned whether it is really fairb. investors do not willingly take a risk when it is possible to lose moneyc. losing a given amount of money would reduce utility more than winning the same amount would increase utilityd. they accept only bets with a sure outcome

B26. The holding period return is calculated asa.

b.

c.

d.

C27. You bought 100 shares of stock at $35, received $3 per share in dividends, and sold the shares for $50. Your holding period return isa. 36%b. $1,503c. 51.4%d. $5,300

B28. Which of the following is true of the holding period return?a. It considers the time value of moneyb. It is independent of the passage of timec. It explicitly considers riskd. It only considers capital gains or losses

C29. A holding period return should only be compared with returns calculateda. over shorter periodsb. over longer periodsc. over periods of the same lengthd. over periods of the same length or less

D30. A stock's return is 15.5%. The return relative isa. 0.845b. -0.845c. 0.155d. 1.155

D31. Return relatives are calculated primarily to deal with the potential problem ofa. changing returnsb. large returnsc. zero returnsd. negative returns

A32. A stock has monthly returns of 4%, 5%, 2%, and -3%. Its arithmetic average return is a. 2%b. 3%c. 4%d. 5%

A33. A stock has monthly returns of 4%, 5%, 2%, and -3%. Its geometric average return is a. 1.9%b. 2.1%c. 3.3%d. cannot be determined

B34. You buy a stock for $50 per share. Over the next four months, it has monthly returns of 4%, 5%, 2%, and -3%. The value of a share at the end of the fourth month is a. $51.20b. $54.02c. $54.12d. $56.45

A35. Suppose a stock pays no dividends. Another method of calculating the return relative isa.

b.

c.

d.

A36. The arithmetic mean is always _______ the geometric mean.a. greater than or equal tob. greater thanc. less than or equal tod. less than

A37. The _____ the dispersion in a series of numbers, the ____ the gap between the arithmetic and geometric mean.a. greater, greaterb. greater, smallerc. smaller, greaterd. more predictable, less predictable

A38. Technically, _____ refers to the past; _____ refers to the future.a. return, expected returnb. realized return, returnc. return relative, returnd. return, return relative

C39. According to the book, which of the following terms can mean different things to different people?a. Return on assetsb. Return on equityc. Return on investmentd. Return of principal

B40. The use of _____ can dramatically affect an investor's return.a. historical datab. leveragec. arithmetic averagesd. variance calculations

D41. Total risk can be measured by all of the following excepta. varianceb. standard deviationc. semi-varianced. arithmetic meanD42. The variance of x is 25. What is the variance of 2x?a. 25b. 50c. 75d. 100

B43. Semi-variance only considersa. extreme variationb. adverse variationc. unexpected variationd. anticipated variation

C44. Discrete random variables are _____; continuous random variables are ______.a. quantifiable, unquantifiableb. objective, subjectivec. counted, measuredd. dependent, independent

B45. A variable whose value is based on the value of other variables is a(n)a. independent variableb. dependent variablec. stochastic variabled. estimated variable

A46. Random variables reside in a populationa. sampleb. continuous setc. discrete set

A47. A jar contains a mixture of coins; you need a quarter. From your perspective, the distribution of coins in the jar is univariatea. bivariateb. trivariatec. multivariateD48. If a distribution shows more possible outcomes on one side of the mean than the other, the distribution showsa. uniformityb. normal characteristicsc. random characteristicsd. skewness

D49. A coin-flipping experiment in which you measure heads or tails takes observations from a _____ distribution.a. chi-squareb. exponentialc. Poissond. binomial

D50. Which of the following is a measure of central tendency?a. Skewnessb. Variancec. Kurtosisd. Mean

D51. The expected value of a random variable is also called thea. skewnessb. variancec. kurtosisd. mean

D52. A jar contains 100 quarters, 50 dimes, and 50 nickels. What is the expected value of a single observation from this coin population?a. $0.375b. $0.200c. $0.133d. $0.163

D53. Which of the following can help reduce the effect of outliers?a. Roundingb. Regressionc. Interpolationd. Logarithms

C54. The expected value of x is 5%. What is E(6x)?a. 0.833%b. 5%c. 30%d. Cannot be determined

A55. The correlation coefficient is equal toa.

b.

c.

d.

A56. The minimum value of the correlation coefficient isa. -1b. 0c. +1d. there is no minimum value

D57. The minimum value of covariance isa. -1b. 0c. +1d. there is no minimum value

A58. R squared is a measure ofa. goodness of fitb. partial dispersionc. central tendencyd. skewness

B59. A sample of 100 observations has a standard deviation of 25. What is the standard error?a. 5b. 2.5c. .25d. Cannot be determined

C60. A sample of 100 observations has a standard deviation of 25 and a mean of 75. What is the 95% confidence interval?a.

b.

c.

d.

B61. The expected return on A is 12%; the expected return on B is 15%. What is the expected return of a portfolio that contains one-third A and the remainder B?a. 12%b. 14%c. 15%d. 13.5%

A62. A tilde (~) over a symbol indicates it is aa. random variableb. constantc. continuous random variabled. discrete random variable

B63. If two securities are negatively correlated, their covariance isa. positiveb. negativec. zerod. cannot be determined

C64. The covariance between a random variable and a constant isa. negativeb. positivec. zerod. non-negative

A65. Return is thea. benefit associated with an investmentb. realized gain from an investmentc. realized and unrealized gain from an investmentd. measurable gain from an investment

C66. Assume the risk-free rate is constant over time. The correlation between the return on security x and the return on the risk-free asset isa. negativeb. positivec. zerod. cannot be determined without further information

A67. The correct method for measuring the average return over several periods in the past is with a(n)a. geometric meanb. arithmetic meanc. statistical meand. multiple variation mean

B68. Using semivariance to measure risk is appropriate if the return distribution isa. symmetricalb. not symmetricalc. normally distributedd. uniformly distributed

C69. The median of a distribution is thea. arithmetic averageb. geometric averagec. point where half of the observations lie on either sided. value that occurs most frequently

D70. If the variance of x is 0.10, what is the variance of 2x?a. 0.05b. 0.10c. 0.20d. 0.40

B71. If the standard deviations of Stock A and B are 0.20 and 0.30 respectively and the COV(A,B) equals 0.012, what is the correlation coefficient?a. 0.00072b. 0.20c. 0.30d. 2Chapter Three

Setting Portfolio Objectives

A1. Two dominant factors contributing to a successful investment program area. suitable investment objectives and policy, and successful managersb. suitable investment objectives and risk assessmentc. successful managers and successful income generationd. accurate risk assessment and measurement of historical return

B2. To an investment professional, which of the following provides no growth?a. Real estateb. Savings accountsc. Common stockd. Corporate bonds

B3. With bequests, a semantic problem sometimes develops with regard to the meaning of the termsa. growth and incomeb. principal and interestc. risk and returnd. present value and future value

D4. A good example of the issue of multiple portfolio beneficiaries is found in peoplea. who want income and those who want growthb. who are risk averse and those who are notc. who pay taxes and those who do notd. today and people tomorrow

A5. Which of the following deals with decisions that have been made about long-term investment activities, eligible investment categories, and the allocation of funds among the eligible investment categories?a. Investment policyb. Investment strategyc. Investment tacticsd. Investment standards

C6. All of the following are principal portfolio objectives EXCEPTa. stability of principalb. capital appreciationc. growth and incomed. income

A7. If someone wants no chance of a loss of principal value, the appropriate primary objective isa. stability of principalb. incomec. growth of incomed. capital appreciation

C8. If someone is concerned about inflation eroding purchasing power of regular income, the appropriate primary objective isa. stability of principalb. incomec. growth of incomed. capital appreciation

D9. A young, well-paid professional is best suited, on average, to which primary objective?a. Stability of principalb. Incomec. Growth of incomed. Capital appreciation

D10. In the early years, which primary objective generally results in the least income?a. Stability of principalb. Incomec. Growth of incomed. Capital appreciation

A11. A growth-of-income objectivea. sacrifices some current return for some purchasing power protectionb. generates maximum income as soon as possible c. makes only sparing use of equity securitiesd. generates income that declines over time

B12. Tax-free income can be earned by investing ina. corporate bondsb. municipal bondsc. treasury bondsd. common stock

C13. All investors seek toa. maximize their expected returnb. minimize their risk exposurec. maximize their expected utilityd. minimize the number of their capital losses

B14. Some people do not like mutual funds because theya. have no tax advantagesb. are not excitingc. offer less potential return than that available in securitiesd. are too risky

D15. Establishing a secondary objective helps the portfolio managera. learn more about the client's tax situationb. learn more about the client's expected utility of investmentc. determine the appropriate level of risk for the customerd. determine the necessary level of equity investment

C16. Which of the following primary/secondary objective combinations is infeasible?a. Stability of principal, incomeb. Income, stability of principalc. Growth of income, stability of principald. Capital appreciation, growth of income

A17. Which of the following primary/secondary objective combinations is infeasible?a. Stability of principal, growth of incomeb. Income, growth of incomec. Growth of income, capital appreciationd. Income, capital appreciation

B18. Which of the following primary/secondary objective combinations is infrequent?a. Stability of principal, growth of incomeb. Income, capital appreciationc. Growth of income, capital appreciationd. Growth of income, stability of principal

A19. A disadvantage of portfolio splitting is that ita. enables overseers to avoid making tough decisionsb. reduces current incomec. reduces the potential for capital appreciationd. sacrifices liquidity

A20. A common third category of investment (in addition to bonds and stock) isa. cash equivalentsb. municipal securitiesc. American depository receiptsd. repurchase agreements

A21. Another name for portfolio dedication isa. liability fundingb. technical analysisc. fundamental analysisd. strategic investment

B22. Cash matching involves assembling a portfolio such that ita. has the duration desiredb. has a cash flow stream that matches the requirements of a liability streamc. optimizes the risk/return combinationd. is informationally efficient

A23. Principal concerns in duration matching are thea. present value of the outflows and their durationb. future value of the outflows and their durationc. annuity value of the outflowsd. certainty equivalent of the outflows and the present value of its duration

D24. To reduce the duration of a bond portfolio, managers often use a. shares of common stockb. hard asset investmentsc. preferred stock sharesd. treasury bills

C25. The first mutual fund was founded ina. 1776b. 1815c. 1924d. 1957

C26. The approximate number of mutual funds in the United States isa. 100b. 1,000c. 10,000d. 30,000

A27. Which of the following trades on a stock exchange?a. A closed-end fundb. An open-end fundc. Any mutual fundd. Any investment company

C28. For an open-end mutual funda. net asset value < market valueb. net asset value > market valuec. net asset value = market valued. net asset value is greater than or equal to market value

C29. If you buy shares in a load fund, you will paya. net asset valueb. less than net asset valuec. more than net asset valued. cannot be determined

A30. Before buying mutual fund shares, prospective investors must receive aa. prospectusb. indenturec. debentured. hypothecation agreement

B31. The portfolio objective with the highest risk isa. stability of principalb. capital appreciationc. incomed. growth of income

D32. A clients need for liquidity might best be addressed bya. investing in growth industry stocksb. investing in real estatec. increasing the proportion of bonds in the portfoliod. investing a portion of the portfolio in assets with checkwriting privileges

A33. Money market mutual funds are sometimes added in a portfolio toa. reduce the durationb. increase the durationc. move from an income objective to a growth in income objectived. decrease the short-term tax consequences

D34. An objective to lower the short-term taxes for a client might be addressed by includinga. stocks in the utilities industryb. short-term U.S. Treasury securitiesc. long-term U.S. Treasury securitiesd. municipal bonds

C35. A no-load mutual fund means there are noa. management feesb. 12 b-1 feesc. selling feesd. stocks that pay dividends in this mutual fund

B36. A redemption fee is a cost to thea. manager of a mutual fund to pay for poor investment decisionsb. manager of a mutual fund when he resignsc. investor of a mutual fund on the sale of sharesd. investor of a mutual fund when performance is poor

D37. A mutual fund prospectus providesa. a forecast of future fund performanceb. a forecast of the macroeconomy over the next yearc. a forecast of the expected tax consequences over the next yeard. provides the funds purpose and intended investment activity

A38. The majority of mutual funds can be classified asa. stock fundsb. taxable bond fundsc. municipal bond fundsd. money market funds

D39. Which of the following deal with decisions that have been made about long-term decisions?a. Investment constraintsb. Fiduciary interestc. Investment strategyd. Investment policyChapter Four

Investment Policy

C1. Retirement plans in the United States are subject toa. FDRCb. FERCc. ERISAd. ESSES

A2. All of the following are purposes of an investment policy statement EXCEPTa. identify portfolio managerb. identify target returnc. identify investment constraintsd. provide a mechanism for evaluation

B3. Clients are responsible for all of the following EXCEPTa. defining long-range objectivesb. asset allocationc. ensuring managers follow the investment policyd. establishing investment policy

D4. The investment manager is responsible for all of the following EXCEPTa. educating the client regarding infeasible objectivesb. monitoring the portfolioc. revising the portfolio as necessaryd. establishing investment policy

B5. In the Bailard, Biehl, and Kaiser classification system what kind of person is impetuous and anxious?a. Individualistb. Celebrityc. Adventurerd. Guardian

A6. In the Bailard, Biehl, and Kaiser classification system what kind of person is confident and careful?a. Individualistb. Celebrityc. Adventurerd. Guardian

C7. In the Bailard, Biehl, and Kaiser classification system what kind of person is impetuous and confident?a. Individualistb. Celebrityc. Adventurerd. Guardian

D8. All of the following are true regarding an endowment fund excepta. it is not-for-profitb. churches and universities often have onec. it has a board of trustees or directorsd. is has a maximum life of 75 years

B9. An endowment is most similar to aa. defined contribution pension planb. foundationc. property and casualty insurance companyd. mutual fund

C10. The legal literature speaks of the ______ between the needs of current beneficiaries and future beneficiaries.a. parsimonyb. symbiosisc. creative tensiond. rational expectations

A11. An investors tendency to look at their investment portfolio too often is partially explained by a phenomenon known asa. myopic loss aversionb. absolute risk aversionc. time and state preferenced. mental accounting

D12. Surplus management is most associated witha. mutual fundsb. endowment fundsc. foundationsd. insurance companies

C13. The single most important investment decision isa. time horizonb. investment strategyc. asset allocationd. risk assessment

B14. A good performance benchmark should bea. published in a national financial newspaper like the Wall Street Journalb. investablec. composed equally of stocks and bondsd. revised as market conditions change

B15. All of the following are infeasible return objectives excepta. maintain purchasing power with 100% probabilityb. average a 9% rate of return over a five year averagec. earn a 10% rate of return each calendar yeard. ensure the value of the fund never falls below the initial principal and that it produces an annual yield of 7%

A16. Most states have adopted thea. Uniform Management of Institutional Funds Actb. Foundation Policy Actc. Uniform Statement of Investment Policyd. Safe Harbor Institutional Security Statement

D17. Major categories of constraints in the investment policy statement include all of the following excepta. tax situationb. liquidity needsc. legal considerationsd. benchmarking

A18. Purposes of an endowment fund include all of the following excepta. raise the visibility of the institutionb. help maintain operating independencec. provide operational stabilityd. provide a margin of excellence

B19. The two main types of pension funds area. defined contribution and variable contributionb. defined contribution and defined benefitc. fixed annuity and variable annuityd. equity based and fixed income basedD20. The investment policy of which of the following is mostly liability driven?a. Mutual fundb. Property and casualty insurance companyc. Foundationd. Life insurance company

A21. Characteristics of a good investment policy statement include all of the following excepta. revised quarterlyb. realisticc. unambiguous to an outsiderd. sustainable over prior periods

B22. The investment policy is the responsibility of thea. investment managerb. clientc. ERISA administratorsd. SEC

C23. Enforcing the ERISA regulations is the responsibility ofa. investment managersb. the Federal Reservec. the Department of Labord. the SEC

D24. The investment policy statement should be changed if there is a material change ina. economic conditionsb. the performance of the portfolioc. the allocation of assets in the portfoliod. the clients financial condition

C25. A foundation is a. the section of an investment policy statement that specifies the primary goals and objectives of an investor b. the first section of an investment policy statement c. an organization designed to aid the arts, education, research or general welfare d. a legal document outlining the portfolio management principles to be followed

D26. A fiduciary is a. an investor with experience managing investments b. an investor with little experience managing investments c. an investment advisor to those managing investmentsd. someone responsible for the management of someone elses money

A27. Socially responsible investing based on religious beliefs is known asa. faith-based investingb. denominational investingc. religious fund managementd. life ethics investing

Chapter Five

The Mathematics of Diversification

A1. The work of Harry Markowitz is based on the search fora. efficient portfoliosb. undervalued securitiesc. the highest long-term growth ratesd. minimum risk portfolios

B2. Securities A and B have expected returns of 12% and 15%, respectively. If you put 30% of your money in Security A and the remainder in B, what is the portfolio expected return?a. 13.4%b. 14.1%c. 14.6%d. 15.3%

B3. Securities A and B have expected returns of 12% and 15%, respectively. If you put 40% of your money in Security A and the remainder in B, what is the portfolio expected return?a. 13.4%b. 13.8%c. 14.6%d. 15.3%

B4. The variance of a two-security portfolio decreases as the return correlation of the two securitiesa. increasesb. decreasesc. changes in either directiond. cannot be determined

D5. A security has a return variance of 25%. The standard deviation of returns isa. 5%b. 15%c. 25%d. 50%

C6. A security has a return variance of 16%. The standard deviation of returns isa. 4%b. 16%c. 40%d. 50%

A7. Covariance is the product of two securities'a. expected deviations from their meansb. standard deviationsc. betasd. standard deviations divided by their correlation

C8. The covariance of a random variable with itself isa. its correlation with itselfb. its standard deviationc. its varianced. equal to 1.0

D9. Covariance is _____ correlation is ______.a. positive, positive or negativeb. negative, positive or negativec. positive or negative, positive or zerod. positive or negative, positive or negative

C10. For a six-security portfolio, it is necessary to calculate ___ covariances plus ___ variances.a. 36, 6b. 30, 6c. 15, 6d. 30, 12

B11. COV (A,B) = .335. What is COV (B,A)?a. - 0.335b. 0.335c. (0.335 x 0.335)d. Cannot be determined

A12. One of the first proponents of the single index model wasa. William Sharpeb. Robert Mertonc. Eugene Famad. Merton Miller

B13. Without knowing beta, determining portfolio variance with a sixty-security portfolio requires ___ statistics per security.a. 1b. 60c. 3600/2d. 3600

B14. Securities A, B, and C have betas of 1.2, 1.3, and 1.7, respectively. What is the beta of an equally weighted portfolio of all three?a. 1.15b. 1.40c. 1.55d. 1.60

B15. Securities A, B, and C have betas of 1.2, 1.3, and 1.7, respectively. What is the beta of a portfolio composed of 1/2 A and 1/4 each of B and C?a. 1.15b. 1.35c. 1.55d. 1.60

B16. A diversified portfolio has a beta of 1.2; the market variance is 0.25. What is the diversified portfolios variance?a. 0.33b. 0.36c. 0.41d. 0.44

B17. Security A has a beta of 1.2; security B has a beta of 0.8. If the market variance is 0.30, what is COV (A,B)?a. .255b. .288c. .314d. .355

B18. As portfolio size increases, the variance of the error term generallya. increasesb. decreasesc. approaches 1.0d. becomes erratic

C19. The least risk portfolio is called thea. optimum portfoliob. efficient portfolioc. minimum variance portfoliod. market portfolio

B20. Industry effects are associated witha. the single index modelb. the multi-index modelc. the Markowitz modeld. the covariance matrix

A21. COV (A,B) is equal toa. the product of their standard deviations and their correlationb. the product of their variances and their correlationc. the product of their standard deviations and their covariancesd. the product of their variances and their covariances

A22. The covariance between a constant and a random variable isa. zerob. 1.0c. their correlationd. the product of their betas

D23. The covariance between a security's returns and those of the market index is 0.03. If the security beta is 1.15, what is the market variance?a. 0.005b. 0.010c. 0.021d. 0.026

D24. COV(A,B) = 0.50; the variance of the market is 0.25, and the beta of Security A is 1.00. What is the beta of security B?a. 1.00b. 1.25c. 1.50d. 2.00

D25. There are 1,700 stocks in the Value Line index. How many covariances would have to be calculated in order to use the Markowitz full covariance model?a. 1,700b. 5,650c. 12,350d. 1,444,150

A26. There are 1,700 stocks in the Value Line index. How many betas would have to be calculated in order to find the portfolio variance?a. 1,700b. 5,650c. 12,350d. 1,444,150

A27. Knowing beta, determining the portfolio with a sixty-security fully diversified portfolio requires ______ statistic(s) per security.a. 1b. 60c. 3600/2d. 3600

A28. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the expected return for a portfolio with 80% invested in Stock A and 20% invested in Stock B?a. 17%b. 19%c. 21%d. 23%

B29. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the standard deviation for a portfolio with 80% invested in Stock A and 20% invested in Stock B?a. 15.8%b. 18.4%c. 22.0%d. 28.0%

A30. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the beta for a portfolio with 80% invested in Stock A and 20% invested in Stock B?a. 0.57b. 0.77c. 0.97d. 1.17

A31. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the covariance between Stock A and Stock B?a. 0.015b. 0.025c. 0.035d. 0.045

C32. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the percent invested in Stock A to yield the minimum standard deviation portfolio containing Stock A and Stock B?a. 25%b. 50%c. 75%d. 90%

C33. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the expected return for a portfolio with 50% invested in Stock A and 50% invested in Stock B?a. 18%b. 19%c. 20%d. 21%

B34. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the standard deviation for a portfolio with 50% invested in Stock A and 50% invested in Stock B?a. 15%b. 20%c. 23%d. 25%

C35. Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the beta for a portfolio with 50% invested in Stock A and 50% invested in Stock B?a. 0.425b. 0.625c. 0.825d. 1.125

B36. Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50. What is the expected return for a portfolio with 70% invested in Stock M and 30% invested in Stock N?a. 11%b. 13%c. 15%d. 17%

C37. Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50. What is the standard deviation for a portfolio with 70% invested in Stock M and 30% invested in Stock N?a. 12.5%b. 13.6%c. 15.7%d. 18.0%

B38. Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50. What is the covariance between Stock M and Stock N?a. 0.01052b. 0.01875c. 0.03425d. 0.04775

D39. Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50. What is the percent invested in Stock M to yield the minimum standard deviation portfolio containing Stock M and Stock N?a. 34%b. 55%c. 73%d. 92%

A40. Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50. What is the expected return for a portfolio with 80% invested in Stock M and 20% invested in Stock N?a. 12%b. 14%c. 16%d. 18%

B41. Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50. What is the standard deviation for a portfolio with 80% invested in Stock M and 20% invested in Stock N?a. 13.2%b. 15.1%c. 17.3%d. 21.5%

A42. Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50. What is the beta for a portfolio with 80% invested in Stock M and 20% invested in Stock N?a. 0.688b. 0.738c. 0.878d. 0.968

The next 8 questions relate to the following table of information:

Stock X Stock Y

Expected Return14%18%Standard Deviation40%54%Beta1.201.50Correlation (X,Y) = 0.25

C43. What is the expected return for a portfolio with 60% invested in X and 40% invested in Y?a. 14.4%b. 14.9%c. 15.6%d. 16.1%

B44. What is the standard deviation for a portfolio with 60% invested in X and 40% invested in Y?a. 32.4%b. 36.1%c. 41.2%d. 45.6%

C45. What is the beta for a portfolio with 60% invested in X and 40% invested in Y?a. 1.12b. 1.22c. 1.32d. 1.42

D46. What is the covariance between Stock X and Stock Y?a. 0.025b. 0.033c. 0.047d. 0.054

D47. What is the percent invested in Stock X to yield the minimum variance portfolio with Stock X and Stock Y?a. 0.21b. 0.38c. 0.51d. 0.69

D48. What is the expected return for a portfolio with 20% invested in X and 80% invested in Y?a. 14.9%b. 15.6%c. 16.5%d. 17.2%

B49. What is the standard deviation for a portfolio with 20% invested in X and 80% invested in Y?a. 41.2%b. 45.8%c. 47.1%d. 49.6%

D50. What is the beta for a portfolio with 20% invested in X and 80% invested in Y?a. 1.14b. 1.24c. 1.34d. 1.44

Chapter Six

Why Diversification is a Good Idea

A1. Risk averse people only take risks whena. they believe they will be rewarded for doing sob. they have toc. it is necessary to guarantee an additional realized returnd. actual returns are below expected return

C2. The collection of eligible investments is called thea. eligible setb. efficient setc. security universed. principal components

C3. A security dominates another ifa. it offers the same expected return with less riskb. it offers higher expected return for the same riskc. both a and bd. none of the above

B4. In the absence of a riskfree rate, the minimum variance portfolioa. is usually efficientb. is always efficientc. is never efficientd. is usually the optimal portfolio

A5. Portfolios that are not dominateda. lie on the efficient frontierb. are minimum risk portfoliosc. have maximum expected returnsd. have low correlations

A6. With the availability of a riskfree rate, the efficient frontier becomesa. linearb. curvedc. shaped like a letter S d. less attractive by moving down and to the right

C7. Portfolios _____ do not exist. a. at the far right of the efficient frontierb. at the far left of the efficient frontierc. above the efficient frontierd. below the efficient frontier

A8. The line passing through the risk free rate and the market portfolio is called thea. market lineb. optimum combination linec. dominant lined. unlevered investment line

C9. According to the separation theorem, all investors should holda. as many securities as possibleb. as many uncorrelated securities as possiblec. only the risk-free rate and the market portfoliod. only two risky portfolios on the efficient frontier

D10. Efficient portfolios to the left of the market portfolio are calleda. borrowing portfoliosb. fully invested portfoliosc. dominant portfoliosd. lending portfolios

A11. Most computer output of efficient portfolios lists only thea. corner portfoliosb. odd-numbered portfoliosc. low variance portfoliosd. maximum return portfolios

D12. The Markowitz algorithm is an application ofa. linear programmingb. goal programmingc. integer programmingd. quadratic programming

C13. What is the beta of the risk-free asset?a. 1.0b. 0.5c. 0d. 1.0

B14. The value of a negative beta asset isa. the higher expected return of this assetb. the risk reducing properties when added to a portfolioc. that it is a necessary component to have a fully diversified portfoliod. non-existent because negative beta assets are theoretically impossible

C15. The Security Market Line relates expected return to a. standard deviationb. variancec. betad. there is no relationship of the SML with expected returns

B16. The Security Market Line is aa. curved line which passes through the risk-free rate and the Market portfoliob. straight line which passes through the risk-free rate and the Market portfolioc. line which dominates all assets except those on the efficient frontierd. line tangent to the efficient frontier

A17. Beta is usually calculated using the a. market modelb. SMLc. CMLd. security variances

Chapter Seven

International Investment and Diversification

C1. In the U.S., a typical allocation to international stocks would bea. 1-2%b. 5-7%c. 10-20%d. 30-50%

C2. U.S. equities represent about _________ of the worlds equity capitalization.a. 8%b. 17%c. 51%d. 83%

B3. When the Evans and Archer study is repeated with a security universe that includes international securities, the level of systematic riska. increasesb. decreasesc. remains unchangedd. there is no relation between systematic risk and the Evans and Archer study

C4. For a portfolio with only U. S. securities, market risk accounts for about ___ of a security's total risk.a. 5%b. 17%c. 27%d. 54%

B5. A study by Solnik indicates that systematic risk could be reduced to about ______ for a portfolio including both U.S. and international stocks.a. 6.2%b. 11.7%c. 19.6%d. 27.1%

B6. The correlation among securities on European exchanges is generallya. decreasingb. increasingc. remaining unchangedd. cannot be determined

D7. According to a study by Bruno Solnik, what percentage of total risk can be diversified away by holding international securities?a. One halfb. Five eighthsc. Three fourthsd. Seven eighths

C8. Globally, the number of equity securities is abouta. 100,000b. 250,000c. 1 milliond. 100 million

A9. The changing relationships among currencies of interest to you constitute ______ risk.a. foreign exchangeb. politicalc. sociald. international

B10. If something costs NZ$110 and the exchange rate between the New Zealand dollar and the U. S. dollar is $0.5855/NZ$, what is the cost in U. S. dollars?a. $58.55b. $64.41c. $110.00d. $187.88

B11. Suppose someone holds a security denominated in Australian dollars. If the Australian value of the security does not change but the U. S. dollar depreciates relative to the Australian dollar, the security holder has aa. paper lossb. paper gainc. realized gaind. realized loss

D12. An investor purchased a security for 10,000 when the exchange rate was 750/$. He later sold the security for 12,000 and the exchange rate had changed to 850/$. What was the holding period return from a US investor's perspective?a. -5.9%b. -2.3%c. 2.3%d. 5.9%

A13. An investor's exchange rate frame of reference is called thea. currency of accountb. exchange ratec. nominal rated. international standard

D14. The nominal rate of interest is a function of all of the following EXCEPTa. real rateb. inflation ratec. risk premiumd. prime rate

C15. The current price of a foreign currency is the ___ rate.a. forwardb. futuresc. spotd. delivery

A16. The contractual rate between a bank and a client for the future delivery of foreign exchange is the ___ rate.a. forwardb. futuresc. spotd. delivery

A17. A U. S. storekeeper who entered into an obligation to pay Swiss francs for a delivery of goods could hedge the foreign exchange risk bya. entering into a forward contract to buy Swiss francsb. entering into a forward contract to deliver Swiss francsc. buying a foreign currency which is negatively correlated with the Swiss francd. buying a foreign currency which is positively correlated with the Swiss franc

A18. Forward rates reflect differences ina. national interest ratesb. risk premiumsc. the time value of moneyd. tax treatment

B19. Inflation in the home country causes the value of the home currency to ____ in the global market.a. appreciateb. depreciatec. fluctuated. change

D20. The text described an example of purchasing power parity usinga. automobilesb. bottles of winec. airline ticketsd. Big Mac hamburgers

B21. The extent to which you face foreign exchange risk isa. nominal riskb. exposurec. political riskd. arbitrage risk

B22. A foreign currency exchange forward contract priced at a discount means thea. forward rate is larger than the spot rateb. spot rate is larger than the forward ratec. forward rate minus the risk premium is negatived. spot rate minus the risk premium is negative

A23. The type of foreign exchange risk exposure that a portfolio manager is most concerned with isa. economic exposureb. translation exposurec. transaction exposured. accounting exposure

Chapter Eight

The Capital Markets and Market Efficiency

B1. Capital markets trade securities with a life ofa. less than one yearb. more than one yearc. more than ten yearsd. more than fifteen years

A2. The most important function of the capital markets is the ___ function.a. economicb. continuous pricingc. fair priced. taxation

A3. Which function of the capital markets facilitates the flow of capital from savers to borrowers?a. Economicb. Continuous pricingc. Fair priced. Taxation

B4. Which function of the capital markets enables market participants to get accurate, up-to-date price information?a. Economicb. Continuous pricingc. Fair priced. Taxation

C5. The ______ function of the capital markets removes the fear of buying or selling at an unreasonable price.a. economicb. continuous pricingc. fair priced. taxation

D6. Fair pricing of securities is associated with thea. fair pricing theoryb. separation theoremc. central limit theoremd. efficient market hypothesis

A7. The efficiency referred to in the efficient market hypothesis is ______ efficiency.a. informationalb. operationalc. taxationd. inflation adjusted

C8. The weak form of the efficient market hypothesis states that _____ are of no use in predicting future stock prices.a. balance sheetsb. earnings reportsc. chartsd. annual reports

D9. People who employ charting techniques in the analysis of securities are calleda. operational security analystsb. fundamental security analystsc. informational security analystsd. technical security analysts

D10. To an investment professional, which of the following is most important?a. Past pricesb. Past and present pricesc. Future pricesd. Present and future prices

A11. A means of investigating the weak form of market efficiency is via a _____ test.a. runsb. chartingc. subjectived. psychological

D12. How many runs are in the following sequence? HHHTTTHTHTHHHTTHa. 6b. 7c. 8d. 9

B13. The _____ form of the efficient market hypothesis states that security prices fully reflect all relevant publicly available information.a. weakb. semi-strongc. strongd. semi-efficient

B14. Tests regarding stock splits or dividends are usually tests of the _____ form of market efficiency.a. weakb. semi-strongc. strongd. semi-efficient

C15. Inside information is associated with the ____ form of market efficiency.a. weakb. semi-strongc. strongd. semi-efficient

D16. The notion that some stocks are priced more efficiently than others is associated with thea. weak form of the EMHb. semi-strong form of the EMHc. strong form of the EMHd. semi-efficient market hypothesis

D17. The random walk idea says thata. stock prices move randomlyb. interest rates change randomlyc. the stock market averages change randomlyd. the news arrives randomly

A18. In finance, the term _____ is associated with an unexplained result that deviates from that expected by finance theory.a. anomalyb. paradigmc. inefficiencyd. abnormal profit

B19. There is some evidence that ___ PE stocks outperform stocks with ____ PEs.a. high, lowerb. low, higherc. extreme, more normald. median, more unusual

A20. The small firm effect states thata. firms with low capitalizations outperform larger firmsb. firms with high capitalizations outperform smaller firmsc. firms with average capitalizations outperform average size firmsd. firms with large or small capitalizations outperform average size firms

A21. Stock returns are inexplicably high ina. Januaryb. Mayc. Septemberd. November

B22. A subfield of physics that is being applied to finance isa. quantum mechanicsb. chaos theoryc. angular momentumd. harmonic motion

B23. Which of the following is a Fibonacci number?a. 12b. 13c. 14d. 15

A24. An odd thing about Fibonacci numbers is a. the frequency with which they appear in natureb. their predictive abilityc. the fact that they are all evend. the fact that they are all odd

B25. The first five Fibonacci numbers are 1, 1, 2, 3, and 5. What is the sixth?a. 6b. 8c. 12d. Cannot be determined

D26. Leonardo Fibonacci discovered the sequence of numbers that bears his name while exploringa. the starsb. the behavior of antsc. scores of dart contestsd. the reproduction rates of rabbits

C27. Which of the following is NOT one of the three primary functions of capital markets?a. Economic functionb. Continuous pricing functionc. Social welfare functiond. Fair price function

C28. The small firm effect means thata. small firms affect the market more than large firmsb. small firms affect the market less than large firmsc. low capitalization stocks tend to have a higher risk-adjusted returnd. low capitalization stocks tend to have a lower risk-adjusted return

A29. The neglected firm effect meansa. stocks with a small security analyst following have a higher returnb. stocks with a large security analyst following have a higher returnc. stocks that investment managers monitor frequently have a higher returnd. stocks that investment managers monitor infrequently have a higher return

B30. The overreaction effect states that for stocks that experience extreme long-term gains or lossesa. past winners significantly outperform past losersb. past losers significantly outperform past winnersc. security analysts tend to exaggerate the impact of new informationd. security analysts tend to dampen the impact of new information

C31. The day of the week effect states that the returns ona. Tuesday and Thursday are higher than Monday, Wednesday, and Fridayb. Monday, Wednesday, and Friday are higher than Tuesday and Thursdayc. Monday are lower than returns on Wednesday and Fridayd. Monday are higher than returns on Wednesday and Friday

Chapter Nine

Picking the Equity Players

A1. The three kinds of dividends firms pay area. stock, cash, and propertyb. stock, special, and regularc. cash, special, and regulard. monthly, quarterly, and year-end

B2. Securities held on your behalf by a broker are a. held in a margin accountb. held in a street namec. registered in your name with the issuing companyd. ineligible for corporate dividends

D3. Which of the following is an odd lot?a. 100 sharesb. 500 sharesc. 11,000 sharesd. 11,300 shares

C4. A spin-off is similar to aa. stock splitb. stock dividendc. property dividendd. cash dividend

A5. Rights are associated witha. new stock issuesb. new bond issuesc. any new security issued. newly incorporated firms

C6. The third date in the dividend payment chronology is thea. date of declarationb. ex-dividend datec. date of recordd. date of payment

B7. Stock prices tend to fall on thea. date of declarationb. ex-dividend datec. date of recordd. date of payment

B8. A company's date of record for a dividend is September 15. Which of the following is most likely to be the ex-dividend date?a. September 1b. September 12c. September 19d. October 1

A9. Dividend growth rates are of primary importance toa. fundamental analystsb. technical analystsc. original analystsd. chartists

B10. A stock's current dividend is $4.56; ten years ago it was $2.88. What has been the average annual dividend growth rate?a. 4.0%b. 4.7%c. 5.6%d. 6.6%

C11. A stock sells for $28; its current dividend is $1.00, and its dividend growth rate is 4.4%. What is the shareholder's required rate of return?a. 6.6%b. 7.7%c. 8.1%d. 8.8%

A12. The dividend growth rate should be calculated via the _____ mean.a. geometricb. arithmeticc. harmonicd. standardized

D13. To illustrate why dividends do not matter, the text used a _____ example.a. used carb. new carc. paint cand. shoebox

A14. Dividend policy is associated with which of the following subfields within finance?a. Signalingb. Optimum capital structurec. Market anomaliesd. Technical analysis

D15. A stock split in which shareholders hold fewer shares after the split is aa. forward splitb. direct splitc. indirect splitd. reverse split

A16. The primary motivation for a stock split is usually a desire toa. reduce the stock priceb. reduce the dividend requirementc. reduce the number of shares outstandingd. reduce earnings per share

D17. A 25% stock dividend is equivalent to aa. 2 for 1 stock splitb. 1 for 2 stock splitc. 4 for 5 stock splitd. 5 for 4 stock split

A18. Blue chip stocks generallya. have a long uninterrupted history of dividend paymentsb. are not growth stocksc. have high dividend payout ratiosd. have high price-earnings ratios

D19. A steel company is probably a _____ stock.a. blue chipb. incomec. defensived. cyclical

C20. A retail food company is a good example of a _____ stock.a. blue chipb. incomec. defensived. cyclical

D21. Which of the following pairs of stock categories are mutually exclusive?a. Income, blue chipb. Growth, pennyc. Income, defensived. Cyclical, defensive

B22. If a stock symbol contains a period, this meansa. it trades over the counterb. there is more than one class of stockc. it is a preferred stockd. it trades on the American Stock Exchange

D23. The correct sequence in the dividend payment chronology is thea. date of record, date of declaration, ex-dividend date, date of paymentb. date of declaration, date of record, ex-dividend date, date of paymentc. date of declaration, date of record, date of payment, ex-dividend dated. date of declaration, ex-dividend date, date of record, date of payment

C24. A company just paid a dividend of $2.00 per share. Five years ago, the company paid a dividend of $1.00 per share. What is the average growth rate in dividends?a. 8%b. 10%c. 15%d. 20%

D25. A company just paid a dividend of $3.00 per share. Four years ago, the company paid a dividend of $2.00 per share. You expect the dividend payment to continue growing at this same rate indefinitely into the future. If the required rate of return on equity is 14% per year, what would be a fair price for this stock today?a. 27.09b. 48.70c. 90.09d. 99.65

B26. A company plans to pay a dividend of $2.00 next year and expects the dividend will grow 6% per year indefinitely into the future. If the required rate of return on equity is 12%, what would be a fair price for this stock today?a. 27.33b. 33.33c. 35.33d. 43.33

B27. A company just paid a dividend of $1.50 and expects the dividend will grow 7% per year indefinitely into the future. If the required rate of return on equity is 13%, what would be a fair price for this stock today?a. 25.00b. 26.75c. 30.25d. 35.75

B28. A company plans to pay a dividend of $1.40 next year, $1.60 the following year, and $1.80 three years from now. Thereafter, it is expected that the dividend will grow 5% per year indefinitely into the future. If the required rate of return is 14%, what would be a fair price for this stock today?a. 15.39b. 17.85c. 21.00d. 22.80

Chapter Ten

Equity Valuation Tools

B1. Which of the following is most accurate?a. The present value of a stock is usually less than the current stock price.b. The present value of a stock equals the current stock price.c. The future value of a stock is greater than the current stock price.d. The future value of a stock is less than the current stock price.

A2. In valuing a stock, in the long run ____ are (is) most important.a. earningsb. dividendsc. psychologyd. risk assessment

B3. A stock sells for $30, has a required rate of return of 12%, and current earnings of $2.50. Its present value of growth opportunities (PVGO) isa. $20.83b. $9.17c. $30.00d. $250.00

D4. An investor assigns a required rate of return of 13% to a stock selling for $45 with a P/E ratio of 22. What percentage of the firms current value comes from growth opportunities?a. 25%b. 45%c. 55%d. 65%

A5. A stock sells for $45. An analyst assigns a required rate of return of 12% to the stock. If the analyst subsequently raises the required rate of return, the present value of growth opportunities willa. decreaseb. be unaffectedc. increased. initially decrease but return to the original value

D6. EBITDA is also calleda. cash flow from operationsb. net incomec. operating incomed. operating cash flow

B7. Free cash flow differs from cash flow from operations in that it accounts fora. interest expenseb. capital expendituresc. dividendsd. loan proceeds

B8. An advocate of the PEG ratio usually looks for a ratio less thana. 0b. 1.0c. 10.0d. 100.0

A9. GARP stands fora. growth at a reasonable priceb. generalized auto regressive programc. guaranteed account review procedured. gross accounting residual process

B10. A firm has a return on equity of 12% and a dividend payout rate of 45%. Its sustainable growth rate isa. 5.4%b. 6.6%c. 21.8%d. 26.7%

A11. You calculate that a stock has an implied required rate of return of 15%, a $2.00 current dividend (D0), and a 5% dividend growth rate. If the required rate of return increases to 16%, the stock price willa. fall by $1.91b. fall by $2.33c. rise by $1.91d. rise by $2.33

B12. Which of the following is the correct formulation of the Greenspan model?a. S&P 500 P/E minus the 10-year bond yieldb. 10-year bond yield minus the S&P 500 earnings yieldc. 10-year bond yield minus the S&P 500 P/Ed. S&P 500 earnings yield minus the 10-year bond yield

B13. Which of the following is associated with a Greenspan model value of zero?a. Market undervaluationb. Fair market valuationc. Market overvaluationd. The Greenspan model cannot equal zero.

D14. Which of the following is true regarding a companys trailing versus forward-looking Price/Earnings ratio?a. The trailing P/E will normally exceed the forward P/Eb. The trailing P/E will normally be less than the forward P/E.c. The trailing and forward looking P/E will normally be equal.d. There is no necessary relationship between the trailing and the forward P/E.

D15. A stock sells for $23.67 and currently pays a $0.44 annual dividend. If the market expects a 14% rate of return on this stock, what dividend growth rate do these figures imply?a. 7.2%b. 8.7%c. 10.2%d. 11.9%

Chapter Eleven

Security Screening

B1. The primary motivation for stock screening is

e. the efficient market hypothesisf. lack of timeg. lack of research materialh. the implications of the efficient frontier

C2. Common screens described in the text include all of the following except

e. SAT scoresf. speed in the 40-yard dashg. hobbiesh. bench press ability

D3. All of the following are characteristics of a good screen except

e. ease of administrationf. relevance and appropriatenessg. acceptance to the userh. historical precedent

A4. An investment service that ranks securities on both timeliness and safety is

e. Value Linef. Moody'sg. Weissenberger'sh. Standard and Poor's

A5. Which of the following timeliness and safety rankings is preferred?

e. 1,1f. 1,5g. 3,3h. 5,1

A6. Which of the following publications is published each month with the entire publication conveniently fitting in a briefcase?

e. S&P Stock Guidef. S&P Stock Reportg. Value Line Investment Surveyh. Moody's Manual of Investments

D7. A set of screening criteria dealing with South Africa is the _______ principles.

e. MacBridef. Sutherlandg. Englandh. Sullivan

A8. A set of screening criteria dealing with Ireland is the _____ principles.

e. MacBridef. Sutherlandg. Englandh. Sullivan

A9. Which of the following is a common screening criterion available from a local newspaper?

e. The PE ratiof. The current ratiog. Return on assetsh. Times interest earned

A10. The primary objective of a security screen is to

e. reduce the security universe in sizef. find the best potential investmentg. reduce portfolio riskh. increase portfolio dividends

B11. A quick risk assessment can be accomplished by a historical comparison of

e. current ratio and debt ratiof. ROA and ROEg. dividend yield and PEh. payout ratio and plowback ratioA12. Shadow stocks are identified by the

e. American Association of Individual Investorsf. Value Line Investment Surveyg. Standard & Poor's Corporationh. Dun and Bradstreet Corporation

C13. A popular computerized mutual fund screen is published by

e. Computer Systems, Inc.f. American Portfolios Limitedg. Business Weekh. Dynamic Funds

B14. Which of the following would NOT be strictly associated with socially responsible investing?

e. CERESf. AAIAg. Sullivanh. McBride

D15. Which of the following has a one-page summary of information on 1700 companies including 15 years of key financial information, a 3-5 year forecast, an historical stock price and volume chart, and a brief write-up describing the primary lines of business with current and future prospects?

a. S&P Stock Guideb. Business Week quarterly reviewc. Wall Street Journal annual reviewd. Value Line

Chapter One

The Process of Portfolio Management

B1. Classical security analysis is sometimes calleda. ABC analysisb. EIC analysisc. GBY analysisd. CPI analysis

C2. The modern trend in investments is to ______ security analysis and ______ portfolio management.a. emphasize, emphasizeb. emphasize, de-emphasizec. de-emphasize, emphasized. de-emphasize, de-emphasize

B3. Portfolio management is primarily concerned witha. increasing returnb. reducing riskc. predicting the futured. explaining the past

D4. Most of the academic literature of the past two decades has supported thea. arbitrage pricing theoryb. benefits of high PE stocksc. usefulness of stock chartsd. efficient markets paradigm

A5. The lower the dispersion in returns, the greater the accumulated value of otherwise equal investments. This statement isa. trueb. falsec. true for the short run, but not necessarily true for the long rund. true for the long run, but not necessarily true for the short run

D6. ______ is cheap in the investment business.a. Riskb. Returnc. Timed. Talk

A7. Which of the following is a key concept in finance?a. A dollar today is worth more than a dollar tomorrowb. Regardless of anything else, the higher the stock price, the betterc. Regardless of anything else, the lower the risk, the betterd. Risk averse people will not take a risk

B8. Understanding ______ is essential to bond portfolio management.a. convexityb. durationc. semi-varianced. bond betas

C9. According to the book, the first step in portfolio management isa. setting portfolio objectivesb. formulating an investment strategyc. learning the basic principles of financed. having a game plan for portfolio revision

B10. A portfolio should have both ______ and ______ objective.a. a short term, a long termb. a primary, a secondaryc. an initial, a finald. an explicit, an implicit

A11. One of the most consequential bits of academic research regarding portfolio construction is a paper bya. Evans and Archerb. Andrew and McLaughlinc. Lawrence and Philippatosd. Miles and Ezzell

B12. ______ is a topic in this textbook that most others omit.a. Real estateb. Security screeningc. Performance evaluationd. Principles of the futures market

C13. Real assets discussed in this book includea. artb. rare coinsc. timberlandd. diamonds

D14. Which of the following is a popular means of increasing income from a portfolio?a. Selling bondsb. Selling stock shortc. Buying put optionsd. Option overwriting

A15. Portfolio protection was called ______ until the stock market crash in 1987.a. portfolio insuranceb. portfolio hedgingc. dynamic hedgingd. arbitrage

D16. In this text, the chapter on contemporary issues includes all of the following excepta. tactical asset allocationb. stock lendingc. program tradingd. put-call parity

C17. A stock is a good investment if the company isa. well-runb. in a growing industryc. poorly run but the stock is underpricedd. extremely popular among investors

B18. As an introduction, the two key concepts in finance area. buy low and sell highb. the time value of money and adjustment for riskc. be patient, but strike when the time is rightd. manage earnings and save judiciously

A19. According to Chapter 1, should investors invest in stocks today?a. Yes, because it can be a costly decision to try to time the marketb. Yes, because the economy looks good nowc. No, because the market is too high nowd. No, because the market is too volatile nowChapter Twelve

Bond Pricing and Selection

D1. Bonds are identified by all of the following excepta. issuerb. maturityc. coupond. rating

B2. How much interest does an XYZ 7s09 bond pay each year?a. 9% of parb. 7% of parc. 7.09% of pard. Cannot be determined

B3. The details of a bond issue are contained in thea. debentureb. indenturec. confirmation statementd. call agreement

A4. U. S. treasury bonds are ______ issues.a. full faith and creditb. securedc. subordinatedd. corporate

B5. Which of the following is the correct order of increasing maturity?a. Bills, bonds, notesb. Bills, notes, bondsc. Notes, bills, bondsd. Notes, bonds, bills

C6. Which of the following are most similar?a. Bills and notesb. Bills and bondsc. Notes and bondsd. They are all equally similar

B7. A debenture is like a _____ loan.a. securedb. signaturec. automobiled. mortgage

A8. Which of the following is most likely to be financed by a revenue bond?a. Bridgeb. Low-income housing complexc. Fleet of corporate automobilesd. Airplane

B9. Treasury bonds have an initial life of more than ___ years.a. fiveb. tenc. fifteend. twenty

C10. Debt that uses land and buildings as collateral is a _____ loan.a. collateral trustb. equipment trustc. mortgaged. senior

C11. A cash reserve for the ultimate repayment of bond principal is aa. reserve fundb. depreciation fundc. sinking fundd. interest-only fund

B12. A fleet of trucks might logically be financed witha. collateral trust bondsb. equipment trust certificatesc. mortgagesd. treasury bonds

A13. A loan with a large final payment is a _____ loan.a. balloonb. escrowc. inflatedd. descending

B14. A bond on which the interest is payable only if it is earned is a(n) ____ bond.a. sinking fundb. incomec. subordinatedd. full faith and credit

C15. An income bond is most likely to be associated with financing which of the following?a. An apartment complexb. A public highwayc. A toll bridged. Capital improvements to a park

B16. Typical bond cash flows include all of the following excepta. annuity plus lump sumb. growing annuity plus lump sumc. perpetuityd. lump sum only

C17. An example of a variable rate security is aa. fixed rate mortgageb. consolc. U. S. savings bondd. zero coupon bond

B18. A ____ company issued a famous commodity-backed convertible bond.a. soybean processingb. silver miningc. sugar refiningd. savings and loan

C19. New debt may no longer be issued in _____ form.a. book entryb. registeredc. bearerd. convertible

B20. If you hold a bond certificate with your name on it, it is a _____ bond.a. book entryb. registeredc. bearerd. convertible

A21. Newly issued bonds issued by the U. S. Treasury are in _____ form only.a. book entryb. registeredc. bearerd. convertible

C22. An individual who wishes to buy a U. S. Treasury bond must open an account through thea. Federal Reserve Systemb. Security Investor Protection Corporationc. Treasury Direct Systemd. Federal Deposit Insurance Corporation

C23. The clipping of coupons is associated with _____ bonds.a. book entryb. registeredc. bearerd. convertible

A24. To solve for a bond's yield to maturity with semi-annual interest paymentsa. divide the discount rate by two and double the number of periodsb. divide the discount rate by two and halve the number of periodsc. multiply the discount rate by two and double the number of periodsd. multiply the discount rate by two and halve the number of periods

C25. You own $5,000 par of the XYZ 8s of 09. The bond paid interest six months ago, and pays again tomorrow. How much is the next interest check?a. $40b. $80c. $200d. $400

C26. You own $5,000 par of the XYZ 8s of 09; they sell for 94% of par. The bond paid interest six months ago, and pays again tomorrow. How much is the next interest check?a. $376b. $188c. $200d. $400

C27. A consol is valued as aa. level annuityb. annuity duec. perpetuityd. growing perpetuity

B28. The quantity equalsa. C x Rb. C Rc. CRd. RC

C29. What is the value of a consol that pays $100 per year if the required rate of return is 8%?a. $800b. $1000c. $1250d. $1500

A30. The yield to maturity calculation assumes that _____ are reinvested at the yield to maturity.a. coupon proceedsb. sinking fund paymentsc. the principal paymentsd. dollars equal to the purchase price

D31. A specific yield to maturity can only be locked in with which of the following bonds?a. consolb. variable ratec. convertibled. zero coupon

C32. The effective annual rate is also called thea. arithmetic mean returnb. geometric mean returnc. realized compound yieldd. internal rate of return

C33. If a bond sells for para. current yield exceeds the yield to maturityb. current yield is less than the yield to maturityc. current yield equals yield to maturityd. none of the above

A34. If a bond sells at a premiuma. current yield exceeds the yield to maturityb. current yield is less than the yield to maturityc. current yield equals yield to maturityd. none of the above

B35. If a bond sells at a discounta. current yield exceeds the yield to maturityb. current yield is less than the yield to maturityc. current yield equals yield to maturityd. none of the above

A36. If a bond sells at a premium, its pricea. must decline over timeb. must rise over timec. will remain relatively constant over timed. will be very volatile over time

D37. Someone who relies on investment income for living expenses is most concerned witha. internal rate of returnb. yield to maturityc. realized compound yieldd. current yield

C38. The yield curve is normallya. flatb. descendingc. upward slopingd. none of the above

B39. The yield curve normally has a ____ first derivative and a _____ second derivative.a. positive, positiveb. positive, negativec. negative, positived. negative, negativeA40. If all interest rates rise by a similar amount, this is a _____ in the yield curve.a. parallel shiftb. stochastic aberrationc. non-parallel shiftd. non-stochastic aberration

B41. Corporate bonds rated BBB will show a _____ of yield curve than U. S. Treasury bonds.a. lower levelb. higher levelc. flatter plotd. steeper plot

B42. Forward interest rates are mostly associated with the _____ theory of interest rate structure.a. liquidity premiumb. expectations c. inflation premiumd. normal backwardation

B43. Two-year certificates of deposit yield 5.00%; a one-year CD has a 4.66% rate. What is the one-year forward rate?a. 4.66%b. 5.34%c. 5.66%d. 5.77%

B44. If the expectations theory of interest rates is accurate, the only explanation for an upward sloping yield curve isa. fear of inflationb. an expectation that interest rates will continually increasec. demand for liquidityd. risk aversion

A45. According to the liquidity premium theory of interest ratesa. forward rates are actually higher than the expected interest rateb. forward rates are actually lower than the expected interest ratec. forward rates are equal to the expected interest rated. none of the above

B46. A $1000 par bond has a conversion price of $33.50. Its conversion ratio isa. $29.85b. 29.85 sharesc. $33,500d. 33,500 shares

C47. A $1000 par bond sells for $900 and has a conversion ratio of 25 shares. If the underlying stock price is $35, the conversion value isa. $25b. $100c. $875d. $935

B48. A convertible bond's ____ should never be _____ than its _____.a. conversion value, less, market valueb. conversion value, more, market valuec. conversion ratio, less, conversion priced. conversion price, less, conversion ratio

C49.For a convertible bond, an arbitrage profit would be available if the conversion value isa. positiveb. negativec. greater than the market valued. less than the market value

D50.For a convertible bond, the difference between the bond price and theconversion value is know as thea. intrinsic valueb. residual valuec. discount under conversion valued. premium over conversion value

A51. The maximum level of accrued interest with most bonds occurs _____ times a year.a. twob. fourc. sixd. twelve

A52. The amount a bond buyer pays isa. bond price + accrued interest + brokerage feesb. bond price accrued interest + brokerage feesc. accrued interest bond price + brokerage feesd. accrued interest bond price brokerage fees

C53. How much interest has accrued on an 8%, $1000 par bond seven days after the last interest payment date?a. Noneb. $1.00c. $1.53d. $40.00

C54. Credit risk is also calleda. interest rate riskb. purchasing power riskc. default riskd. reinvestment rate risk

C55. Standard & Poor's bond ratings measurea. interest rate riskb. purchasing power riskc. default riskd. reinvestment rate risk

C56. The demarcation between investment grade bonds and junk bonds is the S&P _____ rating.a. AAAb. AAc. BBBd. B

A57. _____ is a leading bond rating service.a. Moody's Investors Serviceb. Weissenberger's Investment Servicec. Value Line Investment Surveyd. Morningstar

A58. The fact that bond prices change as market interest rates change is a result ofa. interest rate riskb. purchasing power riskc. default riskd. reinvestment rate risk

A59. Which of the following has no interest rate risk?a. Non-negotiable certificate of depositb. U. S. Treasury bondc. Corporate bondd. Mortgage

A60. Call risk is a type of _____ risk.a. convenienceb. marketc. interest rated. default

D61. If a bond is called, the bondholder often receivesa. less than the par valueb. the par value minus the last coupon paymentc. the par value minus the last year's coupon paymentd. the par value plus a call premium

C62. The _____ the _____ on a bond, the higher its reinvestment rate risk.a. higher, yield to maturityb. lower, yield to maturityc. higher, coupond. lower, coupon

C63. Marketability risk refers toa. the possibility of selling a bond for less than the price paidb. the possibility of having the bond calledc. the difficulty in selling a bondd. the magnitude of the total bond risk

B64. Bond prices move _____ with market yields.a. directlyb. inverselyc. exponentiallyd. logarithmically

D65. A famous set of bond pricing relationships isa. Kondradiev's theoremsb. the Dow theoryc. Fibbonacci theoremsd. Malkiel's theorems

B66. _____ term bonds have more _____ risk.a. Longer, reinvestment rateb. Longer, interest ratec. Shorter, reinvestment rate d. Shorter, interest rate

A67. _____ coupon bonds have more _____ risk.a. Higher, reinvestment rateb. Higher, interest ratec. Lower, reinvestment rate d. Lower, interest rate

D68. If interest rates fall, is the price change in a bond with t years until maturity. Suppose there are four bonds: , , , . If the bonds are identical in every respect except for their maturity, which of the following statements is true?a.

( - ) > 0b.

( - ) = 0c.

( - ) - ( - ) > 0d.

( - ) - ( - ) < 0

A69. Malkiel's theorem five deals witha. bond capital gains and lossesb. changing default risk levelsc. declining interest ratesd. call risk

B70. The principal value of duration is the fact thata. it makes knowledge of default risk unnecessaryb. it incorporates Malkiel's theorems in a single expressionc. it incorporates default risk into interest rate riskd. it eliminates the reinvestment rate risk problem

D71. A definition of duration isa. the weighted average life of a bondb. the weighted average value of a bond's cash flowsc. the weighted average of the bond's marketabilityd. the weighted average time until cash flows occur

A72. In calculating duration via the traditional method, the weights reflect thea. time value of moneyb. level of default riskc. level of interest rate riskd. cost of capital

A73. If a $1,000 par value bond has a coupon rate of 6% with interest paid semi-annually, a maturity of 12 years, and a yield-to-maturity of 7%, what is the current price of this bond?a. $919.71b. $989.71c. $1014.71d. $1062.71

B74. If a $1,000 face value bond has a coupon rate of 5.5% with interest paid semi-annually, a maturity of 15 years, and a yield to maturity of 4.5%, what is the current price of this bond?a. $854.66b. $1108.23c. $1162.89d. $1242.72

B75. If a $1,000 face value bond has a coupon rate of 6.5% with interest paid semi-annually, a maturity of 11 years, and a current price of 1090.34, what is the annual yield-to-maturity of this bond?a. 2.7%b. 5.4%c. 5.8%d. 6.8%

C76. If a $1,000 par value bond has a coupon rate of 7% with interest paid semi-annually, a maturity of 18 years, and a current price of $1,235, what is the annual yield-to-maturity of this bond?a. 2.5%b. 4.3%c. 5.0%d. 6.4%

A77. If a $1,000 face value zero coupon bond has a maturity of 15 years and a yield-to-maturity of 6%, what is the current price of this bond?a. $417.27b. $518.27c. $635.51d. $782.48

B78. If a $1,000 face value zero coupon bond has a maturity of 22 years and is currently priced at $521.89, what is the annual yield-to-maturity?a. 2%b. 3%c. 4%d. 5%

B79. What is the duration of a $1,000 par value bond with a coupon rate of 8%, a yield-to-maturity of 6%, and 4 years left to maturity? (Assume annual coupon payments)a. 3.25 yearsb. 3.59 yearsc. 3.72 yearsd. 3.86 years

B80. What is the duration of a $1,000 par value bond with a coupon rate of 6%, a yield-to-maturity of 5%, and 2 years left to maturity? (Interest payments are made semi-annually.)a. 1.7 yearsb. 1.9 yearsc. 2.0 yearsd. 3.8 yearsChapter Thirteen

The Role of Real Assets

B1. Classical characteristics of land include all of the following excepta. it is immobileb. it is fungiblec. it is indestructibled. it is non-income producing

B2. Which of the following is a financial asset?a. Gold barb. Stock certificatec. Automobiled. Office building

D3. Which of the following is a real asset?a. Corporate bondb. Government bondc. Twenty dollar billd. Computer

D4. ______ property is a legal interest in real estate.a. Personalb. Proprietaryc. Financiald. Real

A5. Which of the following is a characteristic of a financial asset?a. It has a corresponding liabilityb. It produces incomec. It usually shows price appreciationd. It usually generates no income

D6. The majority of institutional landowners are looking fora. annual cash flowsb. long-term price appreciationc. short-term price appreciationd. a mix of annual cash flows and long-term price appreciation

B7. Of their investments in real estate, pension funds have about ____ of their money in timberland.a. 2%b. 4%c. 8%d. 12%

A8. Usual motivations for timberland investment include all of the following excepta. regulatory defenseb. collateralc. pure investmentd. strategic investment

A9. State governments with large investments in timberland area. California and New Hampshireb. Missouri and Mainec. Alabama and Texasd. Pennsylvania and New Jersey

B10. Growing trees are calleda. land standsb. stumpagec. wood on the hoofd. volume land

C11. Conditions that make a section of land different than the surrounding terrain are calleda. biological factorsb. fungibility factorsc. microsite factorsd. acquisition factors

D12. A trained forest appraiser knows to look for forests undergoinga. a species shiftb. a micro site shiftc. mutual canopy supportd. a product class shift

A13. Timberland losses due to fire, insects, and disease total less than _____ per year.a. 0.2%b. 2%c. 5%d. 10%

B14. Clear-cutting may be appropriate if a forest depends ona. river drainageb. mutual canopy supportc. wetland waterfowld. animal grazing

A15. A significant inhibition to timberland investment has historically beena. the lack of a standard timberland indexb. adverse Internal Revenue Service rulingsc. high commission costsd. inability to generate income

A16. One study indicates that the correlation coefficient between timberland and the S&P500 index is abouta. -.50b. 0c. .50d. .95

C17. A common motivation for the purchase of gold isa. income generationb. tax advantagesc. the security it providesd. a substitute for equity securities

D18. The price of gold is fixed daily in a. Budapestb. Washington, D. C.c. Amsterdamd. London

A19. The largest percentage of privately held gold is ina. Franceb. United Statesc. Indiad. Saudi Arabia

C20. Which of the following is generally not a driving force behind gold price movements?a. Inflationb. The strength of foreign currenciesc. Supplyd. Demand

A21. The primary advantage of gold certificates isa. convenienceb. tax reasonsc. added income producing abilityd. added security against corporate default

D22. For a U. S. coin in circulation, which of the following is usually highest?a. Numismatic valueb. Intrinsic valuec. Popular valued. Fiat value

C23. Which of the following is not an official gold coin issued by a government?a. South African Krugerrandb. Canadian Maple Leafc. Congolese Harmonicad. Chinese Panda

B24. Land is widely considered to be aa. mobile investmentb. long-term investmentc. fungible investmentd. financial asset

B25. Which of the following is not a way to invest in gold?a. Bullion b. Gold ADRsc. Gold certificatesd. Shares in gold mining companies

Chapter Fourteen

Alternative Assets

D1. A new infrastructure project is a _____ project.a. blue fieldb. red fieldc. gold fieldd. greenfield

B2. In the context of infrastructure investing, PPP stands fora. per-person projectb. public/private partnershipc. progressive project programd. programmed premium project

A3. Which of the following is a characteristic of most infrastructure projects?a. long lifeb. unstable cash flowsc. little leveraged. liquid

C4. A primary objective of most hedge funds isa. maximum capital appreciationb. income generationc. stable returnsd. high correlation with the broad equity market.

D5. All of the following are common hedge fund strategies excepta. directionalb. arbitrage/relative valuec. long/shortd. constant proportion

A6. Drawdown is primarily a measure of a fundsa. volatilityb. profitabilityc. turnoverd. management fee

B7. A primary disadvantage of a hedge fund-of-funds is a. added riskb. higher expensesc. a tax disincentived. high correlation

A8. Institutional investors seeking exposure to commodities normally usea. futures contractsb. individual equity positionsc. physical assetsd. investment contracts

C9. Venture capital is a type ofa. hedge fundb. municipal bondc. private equityd. infrastructure project

A10. The typical profitability pattern of private equity investments is called thea. J curveb. S curvec. U curved. V curve

B11. A strategy described as 130/30 involvesa. equity and bondsb. long and short positionsc. futures and optionsd. short and long-term investments

A12. Mezzanine financing is analogous to aa. second mortgageb. margin loanc. unsecured signature loand. zero coupon bond

Chapter Fifteen

Revision of the Equity Portfolio

B1. In an active management strategy, the composition of the portfolio ise. staticf. dynamicg. determined in advance and not changedh. revised very seldom

B2. A strategy of passive management is one in which, once established, the portfolio ise. readjusted on a regular basisf. largely left aloneg. readjusted at the manager's discretionh. only readjusted if prices decline

B3. Naive strategiese. should never be usedf. are not necessarily bad onesg. are only appropriate with small portfolios of stockh. are seldom in the investor's best interest

D4. Which of the following is a naive strategy?e. Constant betaf. Constant proportiong. Laddered portfolioh. Buy and hold

A5. Common methods of stock portfolio rebalancing include all of the following EXCEPTe. maintaining a constant price earnings ratiof. maintaining a constant betag. indexingh. maintaining a constant proportion

B6. Many investors try to avoide. blue chip stocksf. odd lotsg. no-load mutual fundsh. stocks with no beta

B7. The purchase of odd lots sometimes involvese. added riskf. a slightly higher commission costg. a tax disincentiveh. slightly lower dividends

C8. Round lots are especially important to thee. bond investorf. short-term investorg. option userh. speculator

B9. A portfolio revision strategy that makes use of a multiplier ise. constant mixf. constant proportion portfolio insuranceg. dollar cost averagingh. constant beta

C10. A portfolio has a floor value of $4 million, a market value of $7 million, and a multiplier of 1.5. The investment in stock should bee. $2 millionf. $2.5 milliong. $4.5 millionh. $6 million

A11. A portfolio has a floor value of $4 million, a market value of $7 million, and a multiplier of 1.5. The portfolio will be 100% invested in stock when the portfolio value ise. $12 millionf. $14 milliong. $16 millionh. $18 million

C12. Which of the following statements is most accurate?e. A CPPI strategy sells stock as it risesf. A CPPI strategy fares best in a declining marketg. Market volatility does not help a CPPI strategyh. A CPPI strategy also must maintain a constant mix

D13. A portfolio has a floor value of $4 million, a market value of $7 million, and a multiplier of 1.5. The portfolio will be 100% invested in bonds when the portfolio value isa. $12 millionb. $10 millionc. $8 milliond. $4 million

A14. A constant mix strategy does best in a _____ market.a. volatileb. decliningc. risingd. flat

B15. When stocks outperform bonds, rebalancing a portfolio with a constant mix strategy containing stocks and bonds requiresa. buying stocks and selling bondsb. buying bonds and selling stocksc. buying stocks and bondsd. selling stocks and bonds

C16. Comparing a constant mix strategy and a CPPI strategy, in a rising marketa. both the constant mix and CPPI strategy buy stocksb. both the constant mix and CPPI strategy sell stocksc. the constant mix strategy sells stock while the CPPI strategy buys stockd. the constant mix strategy buys stock while the CPPI strategy sells stock

C17. A constant mix strategy for portfolio rebalancing meansa. constantly changing the mix between stocks and bonds to time the marketb. constantly changing the individual stocks contained in the equity asset allocation categoryc. maintaining the same relative weighting of asset categoriesd. increasing or decreasing the amount of funds in a portfolio depending on the expected return

A18. Suppose you are managing a $1,000,000 portfolio of stocks and bonds with a constant mix strategy of 50% stocks and 50% bonds. If the stock market increases 20% and the bond market increases 10%, rebalancing would requirea. selling $25,000 in stocks and buying $25,000 in bondsb. selling $25,000 in bonds and buying $25,000 in stocksc. selling $50,000 in stocks and buying $50,000 in bondsd. selling $50,000 in bonds and buying $50,000 in stocks

D19. A CPPI portfolio has a floor value of $4 million in stocks, a market value of $7 million, and a multiplier of 1.5. If the value of the portfolio increases 20%, the investment in stocks should be a. $4.4 millionb. $4.8 millionc. $5.4 milliond. $6.6 million

A20. A CPPI portfolio has a floor value of $4 million in stocks, a market value of $7 million, and a multiplier of 1.5. If stocks increase by 20% and bonds increase by 12%, rebalancing requiresbuying $900,000 in stocks and selling $900,000 in bondsa. buying $900,000 in bonds and selling $900,000 in stocksb. buying $1,200,000 in stocks and selling $1,200,000 in bondsc. no action because a CPPI portfolio is passively managed

A21. A stock portfolio designed to mimic a market index but with fewer stocks will likely have less tracking error if it has aa. beta of 1 and a high R2 b. beta of 1 and a low R2 c. beta of 0 and a high R2 d. beta of 0 and a low R2

B22. Which of the following would increase the portfolio beta?a. Selling stocks with low unsystematic risk and buying stocks with high unsystematic riskb. Selling Treasury Bills in the portfolio and buying stocks with low systematic riskc. Selling stocks with high systematic risk and buying stocks with low systematic riskd. Shifting new funds to the portfolio and buying stocks with low systematic risk

D23. Successful implementation of which of the following is inconsistent with the efficient market hypothesis?a. Short sellingb. Stock lendingc. Certificateless tradingd. Tactical asset allocation

A24. The hardest part of a tactical asset allocation strategy isa. asset class appraisalb. product class shiftingc. determining covariancesd. determining the swing component

D25. Investment strategies are common