finance test bank

What is the expected return for a portfolio with 80% invested in Stock A and 20% invested in Stock B.. What is the standard deviation for a portfolio with 80% invested in Stock A and 20%

Chapter Two Valuation, Risk, Return, and Uncertainty

A 1 An ordinary annuity is a _ series of _ cash

B 3 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 $1,000

b $671

c $887

d $557

A 4 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 $725

b $559

c $793

d $772

D 5 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 $726

b $662

c $811

d $684

C 6 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 $2,000

b $20,000

c $12,500

d $125,000

B 7 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 $2,500

b $2,750

c $25,000

d $2,525

A 8 The fact that most investors are risk averse means they will

a only take risks for which they are properly rewarded

b not take a risk

c not voluntarily take a risk

d not take a risk unless they know the outcome in advance

B 9 Which of the following statements is true?

a Some people are risk averse and others are not

b Some people are more risk averse than others

c Risk averse people will not take a risk

d Risk averse people are willing to settle for less return than risk neutral people

A 10 Risk must involve

a a chance of loss

b an unknown probability distribution

c actual dollars

d negative expected returns

C 11 Overall variability of returns is called

a systematic risk

b unsystematic risk

c total risk

d undiversifiable risk

B 12 Risk is often measured as

a central tendency of returns

b dispersion of returns

c expected value of returns

d possibility of negative returns

A 13 Riskier securities have _ returns

B 15 The diminishing marginal utility of money explains why

a some stocks sell for more than others

b most people will not take a fair bet

c people view the stock market as risky

d people tend to pay too much

C 16 The text described an example of the diminishing marginal utility of money

with a statement made by a _ player

a hockey

b football

c tennis

d basketball

C 17 Individual investment behavior is more a function of _ than _

a risk, expected return

b expected return, utility

c utility, expected return

d expected return, risk

B 18 The St Petersburg paradox explains why

a some stocks sell for more than others

b most people will not take a fair bet

c people view the stock market as risky

d people tend to pay too much

A 19 In economic theory, if money is not saved, it is

d all of the above

B 21 Two large classes of risk are

a systematic and undiversifiable

b price and convenience

c realized and psychic

d market and intermarket

C 22 Individual consumption decisions are a major factor in determining

a credit ratings of corporations

b dividend rates

c market interest rates

d levels of perceived risk

B 23 If a stock has a higher than average expected return, you would logically

expect it is

a widely held by investors

b riskier than average

c in an industry with good prospects

d a well-managed company

D 24 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 $7777.64

b $12,500

c $20,000

d $20,600

C 25 Most investors would not be interested in a fair bet because

a they would be concerned whether it is really fair

b investors do not willingly take a risk when it is possible to lose money

c losing a given amount of money would reduce utility more than winning the same amount would increase utility

d they accept only bets with a sure outcome

B 26 The holding period return is calculated as

a

0

0 1

P

income P

P  

c

0

1 0

P

income P

P  

d

0

0 1

P

income P

P  

C 27 You bought 100 shares of stock at $35, received $3 per share in dividends,

and sold the shares for $50 Your holding period return is

a 36%

b $1,503

c 51.4%

d $5,300

B 28 Which of the following is true of the holding period return?

a It considers the time value of money

b It is independent of the passage of time

c It explicitly considers risk

d It only considers capital gains or losses

C 29 A holding period return should only be compared with returns calculated

a over shorter periods

b over longer periods

c over periods of the same length

d over periods of the same length or less

D 30 A stock's return is 15.5% The return relative is

a 0.845

b -0.845

c 0.155

d 1.155

D 31 Return relatives are calculated primarily to deal with the potential problem of

B 34 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

b

1

0

P P

c

0

0 1

P P

P 

A 36 The arithmetic mean is always _ the geometric mean

a greater than or equal to

b greater than

c less than or equal to

d less than

A 37 The _ the dispersion in a series of numbers, the the gap between the

arithmetic and geometric mean

a greater, greater

b greater, smaller

c smaller, greater

d more predictable, less predictable

A 38 Technically, _ refers to the past; _ refers to the future

a return, expected return

b realized return, return

c return relative, return

d return, return relative

C 39 According to the book, which of the following terms can mean different things

B 43 Semi-variance only considers

A 47 A jar contains a mixture of coins; you need a quarter From your perspective,

the distribution of coins in the jar is

univariate

a bivariate

b trivariate

c multivariate

D 48 If a distribution shows more possible outcomes on one side of the mean than

the other, the distribution shows

a uniformity

b normal characteristics

c random characteristics

d skewness

D 49 A coin-flipping experiment in which you measure heads or tails takes

observations from a _ distribution

D 52 A jar contains 100 quarters, 50 dimes, and 50 nickels What is the expected

value of a single observation from this coin population?

A 55 The correlation coefficient is equal to

a

b a

b a



)

~,

~cov(

b cov(a~,b~)ab

c

b a

b a



)

~,

~cov(

~,

~cov(

[1

b a

b a

d there is no minimum value

D 57 The minimum value of covariance is

C 60 A sample of 100 observations has a standard deviation of 25 and a mean of

75 What is the 95% confidence interval?

a 50x75

b 73x77

c 70x80

d 74.5x75.5

B 61 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?

c continuous random variable

d discrete random variable

B 63 If two securities are negatively correlated, their covariance is

a benefit associated with an investment

b realized gain from an investment

c realized and unrealized gain from an investment

d measurable gain from an investment

C 66 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 is

A 67 The correct method for measuring the average return over several periods in

the past is with a(n)

a geometric mean

b arithmetic mean

c statistical mean

d multiple variation mean

B 68 Using semivariance to measure risk is appropriate if the return distribution is

c point where half of the observations lie on either side

d value that occurs most frequently

D 70 If the variance of x is 0.10, what is the variance of 2x?

a 0.05

b 0.10

c 0.20

d 0.40

B 71 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 1 Two dominant factors contributing to a successful investment program are

a suitable investment objectives and policy, and successful managers

b suitable investment objectives and risk assessment

c successful managers and successful income generation

d accurate risk assessment and measurement of historical return

B 2 To an investment professional, which of the following provides no growth?

a Real estate

b Savings accounts

c Common stock

d Corporate bonds

B 3 With bequests, a semantic problem sometimes develops with regard to the

meaning of the terms

a growth and income

b principal and interest

c risk and return

d present value and future value

D 4 A good example of the issue of multiple portfolio beneficiaries is found in

people

a who want income and those who want growth

b who are risk averse and those who are not

c who pay taxes and those who do not

d today and people tomorrow

A 5 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?

C 8 If someone is concerned about inflation eroding purchasing power of regular

income, the appropriate primary objective is

a sacrifices some current return for some purchasing power protection

b generates maximum income as soon as possible

c makes only sparing use of equity securities

d generates income that declines over time

B 12 Tax-free income can be earned by investing in

a corporate bonds

b municipal bonds

c treasury bonds

d common stock

C 13 All investors seek to

a maximize their expected return

b minimize their risk exposure

c maximize their expected utility

d minimize the number of their capital losses

B 14 Some people do not like mutual funds because they

a have no tax advantages

b are not exciting

c offer less potential return than that available in securities

d are too risky

D 15 Establishing a secondary objective helps the portfolio manager

a learn more about the client's tax situation

b learn more about the client's expected utility of investment

c determine the appropriate level of risk for the customer

d determine the necessary level of equity investment

C 16 Which of the following primary/secondary objective combinations is

infeasible?

a Stability of principal, income

b Income, stability of principal

c Growth of income, stability of principal

d Capital appreciation, growth of income

A 17 Which of the following primary/secondary objective combinations is

infeasible?

a Stability of principal, growth of income

b Income, growth of income

c Growth of income, capital appreciation

d Income, capital appreciation

B 18 Which of the following primary/secondary objective combinations is

infrequent?

a Stability of principal, growth of income

b Income, capital appreciation

c Growth of income, capital appreciation

d Growth of income, stability of principal

A 19 A disadvantage of portfolio splitting is that it

a enables overseers to avoid making tough decisions

b reduces current income

c reduces the potential for capital appreciation

d sacrifices liquidity

A 20 A common third category of investment (in addition to bonds and stock) is

a cash equivalents

b municipal securities

c American depository receipts

B 22 Cash matching involves assembling a portfolio such that it

a has the duration desired

b has a cash flow stream that matches the requirements of a liability stream

c optimizes the risk/return combination

d is informationally efficient

A 23 Principal concerns in duration matching are the

a present value of the outflows and their duration

b future value of the outflows and their duration

c annuity value of the outflows

d certainty equivalent of the outflows and the present value of its duration

D 24 To reduce the duration of a bond portfolio, managers often use

a shares of common stock

b hard asset investments

c preferred stock shares

c Any mutual fund

d Any investment company

C 28 For an open-end mutual fund

a net asset value < market value

b net asset value > market value

c net asset value = market value

d net asset value is greater than or equal to market value

C 29 If you buy shares in a load fund, you will pay

a net asset value

b less than net asset value

c more than net asset value

D 32 A client’s need for liquidity might best be addressed by

a investing in growth industry stocks

b investing in real estate

c increasing the proportion of bonds in the portfolio

d investing a portion of the portfolio in assets with checkwriting privileges

A 33 Money market mutual funds are sometimes added in a portfolio to

a reduce the duration

b increase the duration

c move from an income objective to a growth in income objective

d decrease the short-term tax consequences

D 34 An objective to lower the short-term taxes for a client might be addressed by

including

a stocks in the utilities industry

b short-term U.S Treasury securities

c long-term U.S Treasury securities

d stocks that pay dividends in this mutual fund

B 36 A redemption fee is a cost to the

a manager of a mutual fund to pay for poor investment decisions

b manager of a mutual fund when he resigns

c investor of a mutual fund on the sale of shares

d investor of a mutual fund when performance is poor

D 37 A mutual fund prospectus provides

a a forecast of future fund performance

b a forecast of the macroeconomy over the next year

c a forecast of the expected tax consequences over the next year

d provides the fund’s purpose and intended investment activity

A 38 The majority of mutual funds can be classified as

a stock funds

b taxable bond funds

c municipal bond funds

d money market funds

D 39 Which of the following deal with decisions that have been made about

Chapter Four Investment Policy

C 1 Retirement plans in the United States are subject to

a FDRC

b FERC

c ERISA

d ESSES

A 2 All of the following are purposes of an investment policy statement EXCEPT

a identify portfolio manager

b identify target return

c identify investment constraints

d provide a mechanism for evaluation

B 3 Clients are responsible for all of the following EXCEPT

a defining long-range objectives

b asset allocation

c ensuring managers follow the investment policy

d establishing investment policy

D 4 The investment manager is responsible for all of the following EXCEPT

a educating the client regarding infeasible objectives

b monitoring the portfolio

c revising the portfolio as necessary

d establishing investment policy

B 5 In the Bailard, Biehl, and Kaiser classification system what kind of person is

impetuous and anxious?

a Individualist

b Celebrity

c Adventurer

d Guardian

A 6 In the Bailard, Biehl, and Kaiser classification system what kind of person is

confident and careful?

a Individualist

b Celebrity

c Adventurer

d Guardian

C 7 In the Bailard, Biehl, and Kaiser classification system what kind of person is

impetuous and confident?

b churches and universities often have one

c it has a board of trustees or directors

d is has a maximum life of 75 years

B 9 An endowment is most similar to a

a defined contribution pension plan

b foundation

c property and casualty insurance company

d mutual fund

C 10 The legal literature speaks of the between the needs of current

beneficiaries and future beneficiaries

a parsimony

b symbiosis

c creative tension

d rational expectations

A 11 An investor’s tendency to look at their investment portfolio too often is

partially explained by a phenomenon known as

a myopic loss aversion

b absolute risk aversion

c time and state preference

C 13 The single most important investment decision is

a time horizon

b investment strategy

c asset allocation

d risk assessment

B 14 A good performance benchmark should be

a published in a national financial newspaper like the Wall Street Journal

b investable

c composed equally of stocks and bonds

d revised as market conditions change

B 15 All of the following are infeasible return objectives EXCEPT

a maintain purchasing power with 100% probability

b average a 9% rate of return over a five year average

c earn a 10% rate of return each calendar year

d ensure the value of the fund never falls below the initial principal and that it produces an annual yield of 7%

A 16 Most states have adopted the

a Uniform Management of Institutional Funds Act

b Foundation Policy Act

c Uniform Statement of Investment Policy

d Safe Harbor Institutional Security Statement

D 17 Major categories of constraints in the investment policy statement include all

of the following EXCEPT

a tax situation

b liquidity needs

c legal considerations

d benchmarking

A 18 Purposes of an endowment fund include all of the following EXCEPT

a raise the visibility of the institution

b help maintain operating independence

c provide operational stability

d provide a margin of excellence

B 19 The two main types of pension funds are

a defined contribution and variable contribution

b defined contribution and defined benefit

c fixed annuity and variable annuity

d equity based and fixed income based

D 20 The investment policy of which of the following is mostly liability driven?

a Mutual fund

b Property and casualty insurance company

c Foundation

d Life insurance company

A 21 Characteristics of a good investment policy statement include all of the

following EXCEPT

a revised quarterly

b realistic

c unambiguous to an outsider

d sustainable over prior periods

B 22 The investment policy is the responsibility of the

b the Federal Reserve

c the Department of Labor

d the SEC

D 24 The investment policy statement should be changed if there is a material

change in

a economic conditions

b the performance of the portfolio

c the allocation of assets in the portfolio

d the clients financial condition

C 25 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

D 26 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 investments

d someone responsible for the management of someone else’s money

A 27 Socially responsible investing based on religious beliefs is known as

a faith-based investing

b denominational investing

c religious fund management

d life ethics investing

Chapter Five The Mathematics of Diversification

A 1 The work of Harry Markowitz is based on the search for

a efficient portfolios

b undervalued securities

c the highest long-term growth rates

d minimum risk portfolios

B 2 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%

B 3 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%

B 4 The variance of a two-security portfolio decreases as the return correlation of

the two securities

a increases

b decreases

c changes in either direction

A 7 Covariance is the product of two securities'

a expected deviations from their means

b standard deviations

c betas

d standard deviations divided by their correlation

C 8 The covariance of a random variable with itself is

a its correlation with itself

b its standard deviation

c its variance

d equal to 1.0

D 9 Covariance is _ correlation is

a positive, positive or negative

b negative, positive or negative

c positive or negative, positive or zero

d positive or negative, positive or negative

C 10 For a six-security portfolio, it is necessary to calculate _ covariances plus

B 11 COV (A,B) = 335 What is COV (B,A)?

B 13 Without knowing beta, determining portfolio variance with a sixty-security

portfolio requires _ statistics per security

a 1

b 60

c 3600/2

d 3600

B 14 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 1.15

b 1.40

c 1.55

d 1.60

B 15 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 1.15

b 1.35

c 1.55

d 1.60

B 16 A diversified portfolio has a beta of 1.2; the market variance is 0.25 What is

the diversified portfolio’s variance?

a 0.33

b 0.36

c 0.41

d 0.44

B 17 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 .255

B 20 Industry effects are associated with

a the single index model

b the multi-index model

c the Markowitz model

d the covariance matrix

A 21 COV (A,B) is equal to

a the product of their standard deviations and their correlation

b the product of their variances and their correlation

c the product of their standard deviations and their covariances

d the product of their variances and their covariances

A 22 The covariance between a constant and a random variable is

a zero

b 1.0

c their correlation

d the product of their betas

D 23 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 0.005

b 0.010

c 0.021

d 0.026

D 24 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 1.00

b 1.25

c 1.50

d 2.00

D 25 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 1,700

b 5,650

c 12,350

d 1,444,150

A 26 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 1,700

b 5,650

c 12,350

d 1,444,150

A 27 Knowing beta, determining the portfolio with a sixty-security fully diversified

portfolio requires statistic(s) per security

a 1

b 60

c 3600/2

d 3600

A 28 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%

B 29 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%

A 30 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 0.57

b 0.77

c 0.97

d 1.17

A 31 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 0.015

b 0.025

c 0.035

d 0.045

C 32 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%

C 33 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%

B 34 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%

C 35 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 0.425

b 0.625

c 0.825

d 1.125

B 36 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%

C 37 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%

B 38 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 0.01052

b 0.01875

c 0.03425

d 0.04775

D 39 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%

A 40 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%

B 41 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%

A 42 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 0.688

b 0.738

c 0.878

d 0.968 The next 8 questions relate to the following table of information:

D 47 What is the percent invested in Stock X to yield the minimum variance

portfolio with Stock X and Stock Y?

Why Diversification is a Good Idea

A 1 Risk averse people only take risks when

a they believe they will be rewarded for doing so

b they have to

c it is necessary to guarantee an additional realized return

d actual returns are below expected return

C 2 The collection of eligible investments is called the

a eligible set

b efficient set

c security universe

d principal components

C 3 A security dominates another if

a it offers the same expected return with less risk

b it offers higher expected return for the same risk

c both a and b

d none of the above

B 4 In the absence of a riskfree rate, the minimum variance portfolio

a is usually efficient

b is always efficient

c is never efficient

d is usually the optimal portfolio

A 5 Portfolios that are not dominated

a lie on the efficient frontier

b are minimum risk portfolios

c have maximum expected returns

d have low correlations

A 6 With the availability of a riskfree rate, the efficient frontier becomes

a linear

b curved

c shaped like a letter S

d less attractive by moving down and to the right

C 7 Portfolios _ do not exist

a at the far right of the efficient frontier

b at the far left of the efficient frontier

c above the efficient frontier

d below the efficient frontier

A 8 The line passing through the risk free rate and the market portfolio is called the

a market line

b optimum combination line

c dominant line

d unlevered investment line

C 9 According to the separation theorem, all investors should hold

a as many securities as possible

b as many uncorrelated securities as possible

c only the risk-free rate and the market portfolio

d only two risky portfolios on the efficient frontier

D 10 Efficient portfolios to the left of the market portfolio are called

c low variance portfolios

d maximum return portfolios

D 12 The Markowitz algorithm is an application of

a the higher expected return of this asset

b the risk reducing properties when added to a portfolio

c that it is a necessary component to have a fully diversified portfolio

d non-existent because negative beta assets are theoretically impossible

C 15 The Security Market Line relates expected return to

a standard deviation

b variance

c beta

d there is no relationship of the SML with expected returns

B 16 The Security Market Line is a

a curved line which passes through the risk-free rate and the Market portfolio

b straight line which passes through the risk-free rate and the Market portfolio

c line which dominates all assets except those on the efficient frontier

d line tangent to the efficient frontier

A 17 Beta is usually calculated using the

C 1 In the U.S., a typical allocation to international stocks would be

B 3 When the Evans and Archer study is repeated with a security universe that

includes international securities, the level of systematic risk

C 4 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%

B 5 A study by Solnik indicates that systematic risk could be reduced to about

for a portfolio including both U.S and international stocks

D 7 According to a study by Bruno Solnik, what percentage of total risk can be

diversified away by holding international securities?

B 10 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 $58.55

b $64.41

c $110.00

d $187.88

B 11 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 a

a paper loss

b paper gain

c realized gain

d realized loss

D 12 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?

C 15 The current price of a foreign currency is the _ rate

a forward

b futures

c spot

d delivery

A 16 The contractual rate between a bank and a client for the future delivery of

foreign exchange is the _ rate

a forward

b futures

c spot

d delivery

A 17 A U S storekeeper who entered into an obligation to pay Swiss francs for a

delivery of goods could hedge the foreign exchange risk by

a entering into a forward contract to buy Swiss francs

b entering into a forward contract to deliver Swiss francs

c buying a foreign currency which is negatively correlated with the Swiss franc

d buying a foreign currency which is positively correlated with the Swiss franc

A 18 Forward rates reflect differences in

a national interest rates

b risk premiums

c the time value of money

d tax treatment

B 19 Inflation in the home country causes the value of the home currency to

in the global market

B 21 The extent to which you face foreign exchange risk is

a nominal risk

b exposure

c political risk

d arbitrage risk

B 22 A foreign currency exchange forward contract priced at a discount means the

a forward rate is larger than the spot rate

b spot rate is larger than the forward rate

c forward rate minus the risk premium is negative

d spot rate minus the risk premium is negative

A 23 The type of foreign exchange risk exposure that a portfolio manager is most

B 1 Capital markets trade securities with a life of

a less than one year

b more than one year

c more than ten years

d more than fifteen years

A 2 The most important function of the capital markets is the _ function

B 4 Which function of the capital markets enables market participants to get

accurate, up-to-date price information?

a Economic

b Continuous pricing

c Fair price

d Taxation

C 5 The function of the capital markets removes the fear of buying or

selling at an unreasonable price

a economic

b continuous pricing

c fair price

d taxation

D 6 Fair pricing of securities is associated with the

a fair pricing theory

b separation theorem

c central limit theorem

d efficient market hypothesis

A 7 The “efficiency” referred to in the efficient market hypothesis is

C 8 The weak form of the efficient market hypothesis states that _ are of no

use in predicting future stock prices

a balance sheets

b earnings reports

c charts

d annual reports

D 9 People who employ charting techniques in the analysis of securities are called

a operational security analysts

b fundamental security analysts

c informational security analysts

d technical security analysts

D 10 To an investment professional, which of the following is most important?

a Past prices

b Past and present prices