Applied Portfolio Management
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Course Introduction
Applied Portfolio Management focuses on the practical aspects of constructing, managing, and evaluating investment portfolios. The course integrates key concepts of asset allocation, security selection, risk management, and portfolio optimization using real-world data and market scenarios. Students engage in hands-on analysis and decision making, utilizing financial models and tools to balance risk and return in accordance with client objectives and market conditions. Topics also include performance measurement, ethical considerations, and contemporary approaches such as ESG investing. Emphasis is placed on applying theoretical knowledge to actual market situations, preparing students for professional roles in investment management.
Recommended Textbook
Investment Analysis and Portfolio Management 1st Canadian Edition by Frank K. Reilly
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Chapter 1: The Investment Setting
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Q1) Refer to Exhibit 1-10. Compute the standard deviation of the annual rate of return for Stock Z.
A) 0.0070
B) 0.0088
C) 0.0837
D) 0.0935
E) 0.1145
Answer: D
Q2) The total risk for a security can be measured by its
A) Beta with the market portfolio
B) Systematic risk
C) Standard deviation of returns
D) Unsystematic risk
E) Alpha with the market portfolio
Answer: C
Q3) Two measures of the risk premium are the standard deviation and the variance.
A)True
B)False
Answer: False
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Page 3
Chapter 2: The Asset Allocation Decision
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Q1) ____ gains are taxable and occur when an asset is sold for more than its basis (the value of the asset when it was purchased by the original owner, or inherited by the heirs of the original owner).
A) Realized capital
B) Income
C) Portfolio
D) Nominal
E) Real
Answer: A
Q2) Which of the following strategies seeks to increase the portfolio value by reinvesting current income in addition to capital gains?
A) Capital appreciation
B) Capital preservation
C) Return preservation
D) Current income
E) Total return
Answer: D
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Page 4
Chapter 3: Selecting Investments in a Global Market
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Sample Questions
Q1) Agency securities that are issued by Crown corporations and various agencies, are direct obligation of the government.
A)True
B)False
Answer: False
Q2) Rank the following four investments in increasing order of historical risk.
A) Art, T-bills, corporate bonds, and common stock
B) T-bills, common stock, corporate bonds, art
C) Corporate bonds, T-bills, common stock, art
D) Common stock, corporate bonds, T-bills, art
E) T-bills, corporate bonds, common stock, art
Answer: E
Q3) A statistic that measures how two variables tend to move together is the
A) Coefficient of variation
B) Correlation coefficient
C) Standard deviation
D) Mean
E) Variance
Answer: B
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Page 5
Chapter 4: Securities Markets and the Economy
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Sample Questions
Q1) A market is a means through which buyers and sellers are brought together to aid in the transfer of goods and/or services.
A)True
B)False
Q2) Which of the following is true regarding a market order?
A) Specify the buy and sell price.
B) Instruct the broker to return the stock to the lender.
C) Request a loan from the broker to purchase a stock.
D) Buy and sell a stock at the best current price.
E) None of the above.
Q3) When a market is internally efficient, it means that
A) The market has price continuity.
B) The market has minimal transactions costs
C) The market has good depth
D) The market has more buyers than sellers
E) The market has more sellers than buyers
Q4) Informational efficiency is where the cost of acquiring information is very cheap.
A)True
B)False
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Chapter 5: Efficient Capital Markets
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Q1) Studies examining stock splits support the semi-strong form efficient market hypothesis.
A)True
B)False
Q2) Refer to Exhibit 5-5. What is the abnormal rate of return for Stock A when you consider its systematic risk measure (beta)?
A) 1.40%
B) -1.40%
C) 2.80%
D) -2.80%
E) None of the above
Q3) Researchers have found a positive relationship between default spread and stock returns in the long run because a large default spread implies
A) a high risk premium and higher expected returns.
B) a high risk premium and lower expected returns.
C) a low risk premium and higher expected returns.
D) a low risk premium and lower expected returns.
E) None of the above.
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) Consider two securities, A and B. Security A and B have a correlation coefficient of 0.65. Security A has standard deviation of 12, and security B has standard deviation of 25. Calculate the covariance between these two securities.
A) 300
B) 461.54
C) 261.54
D) 195
E) 200
Q2) Between 1985 and 1995, the standard deviation of the returns for the S&P/TSX and the TSX Venture indexes were 0.06 and 0.07, respectively, and the covariance of these index returns was 0.0008. What was the correlation coefficient between the two market indicators?
A) .1525
B) .1388
C) .1458
D) .1622
E) .1064
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Chapter 7: Asset Pricing Models: Capm and Apt
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Q1) Beta is a measure of unsystematic risk.
A)True
B)False
Q2) Refer to Exhibit 7-1. Compute the beta for RA Computer using the historic returns presented above.
A) 0.7715
B) 1.2195
C) 1.3893
D) 1.1023
E) -0.7715
Q3) Since the market portfolio is reasonable in theory, it is easy to implement when testing or using the CAPM.
A)True
B)False
Q4) The capital market line is the tangent line between the risk free rate of return and the efficient frontier.
A)True
B)False
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Chapter 8: Economic and Industry Analysis
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Sample Questions
Q1) Refer to Exhibit 8-1. Estimate the industry growth rate in sales per share.
A) 10.5%
B) 11%
C) 12.16%
D) 9.5%
E) 8.73%
Q2) Which of the following statements is false?
A) Financial institutions are typically adversely impacted by higher rates of interest.
B) Industries with high operating leverage typically benefit with inflation when their costs are fixed in nominal terms.
C) Industries with low financial leverage typically outperform firms with higher leverage when inflation increases.
D) A weaker Canadian dollar typically helps Canadian industries.
E) Consumer cyclical industries are affected by increasing interest rates.
Q3) Studies of industries indicate that their past performance can be useful in predicting future performance.
A)True
B)False
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Chapter 9: Company Analysis and Stock Valuation
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Sample Questions
Q1) Given Gitech's beta of 1.55 and a risk free rate of 8%, what is the expected rate of return assuming a 14% market return?
A) 12.4%
B) 14.3%
C) 17.3%
D) 20.4%
E) 29.7%
Q2) Given Gilbert's beta of 1.10 and a risk free rate of 5%, what is the expected rate of return assuming a 10% market return?
A) 21.5%
B) 10.5%
C) 5.5%
D) 15.5%
E) 16.5%
Q3) Price-to-book value ratio cannot be used to estimate the value of firms with negative earnings or negative cash flows. A)True B)False
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11
Chapter 10: Technical Analysis
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Sample Questions
Q1) All of the following are classified as contrary trading rules, except:
A) Odd lot short sales.
B) Investment advisory opinions.
C) Relative OTC volume.
D) Montreal Exchange put/call ratio.
E) Confidence index.
Q2) Which of the following is not considered an assumption of technical analysis?
A) Market value is determined solely by supply and demand.
B) Supply and demand are governed by both rational and irrational factors.
C) Security prices tend to move in trends that persist for an appreciable length of time.
D) Stock prices follow a random walk.
E) Changes in trend are caused by the shifts in supply and demand relationships.
Q3) The short interest ratio is the ratio between the number of shares sold short and not covered, and the
A) Average number of stocks reaching new highs.
B) Average daily number of stocks that increased in value.
C) Average daily volume of trading on the exchange.
D) Average monthly volume of trading on the exchange.
E) Average number of shares outstanding in those stocks.
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Page 12
Chapter 11: Bond Fundamentals
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Sample Questions
Q1) Refer to Exhibit 11-1. What is the current yield for this bond?
A) 4.18%
B) 5.88%
C) 4.77%
D) 8.125%
E) 4.063%
Q2) All U.S. municipalities are required to buy insurance when they issue bonds. A)True
B)False
Q3) You purchase a 9 3/4s 2009 Feb. $10,000 par Treasury Note at 101:11 and hold it for exactly one year at which time you sell it. What is your rate of return if your selling price is 101:17?
A) 8.14%
B) 8.75%
C) 9.75%
D) 9.81%
E) 10.47%
Q4) In the Eurozone, the government sector is the largest bond market segment. A)True
B)False
Page 13
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Chapter 12: The Analysis and Valuation of Bonds
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Sample Questions
Q1) Assume that you purchase a 10-year $1,000 par value bond, with a 12% coupon, and a yield of 9%. Immediately after you purchase the bond, yields fall to 8% and remain at that level to maturity. Calculate the realized horizon yield, if you hold the bond for 5 years and then sell. Interest is paid annually.
A) 16.25%
B) 12.15%
C) 7.75%
D) 10.05%
E) 9.34%
Q2) Suppose you have a 12%, 20 year bond traded at $850. If it is callable in 5 years at $1,100, what is the bond's yield to call? Interest is paid semiannually.
A) 8%
B) 9.0%
C) 18.0%
D) 9.4%
E) 16.5%
Q3) An interest rate is the price of loanable funds.
A)True
B)False
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Page 14
Chapter 13: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) Refer to Exhibit 13-9. A protective put is an appropriate strategy if
A) An investor wishes to generate additional income.
B) An investor wished to insure against a decline in share values.
C) An investor expected share prices to be volatile.
D) An investor expected share prices to remain in a trading range.
E) An investor expected share prices to be volatile, but was inclined to be bullish.
Q2) A one year call option has a strike price of 70, expires in 3 months, and has a price of $7.34. If the risk free rate is 6%, and the current stock price is $62, what should the corresponding put be worth?
A) $5.34
B) $8.00
C) $10.68
D) $14.33
E) $13.33
Q3) A strip is a call option on a stock that is written by someone that owns the stock.
A)True
B)False
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Chapter 14: Derivatives: Analysis and Valuation
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Sample Questions
Q1) Refer to Exhibit 14-12. Assume that one year later the fixed rate on a new 2-year receive fixed pay floating LIBOR swap has fallen to 7% per year. Settlement is on a semiannual basis. Calculate the market value of the FRN based on $100 face value.
A) $101.33
B) $100.58
C) $100.00
D) $98.67
E) $95.83
Q2) The exercise price of The Canadian Dairy Company is $17. You purchase the warrants for $4.00 each when Canadian Dairy's stock price is $20.00 per share. Each warrant entitles you to purchase one share of CDC stock. Calculate your percentage gain assuming the warrant premium drops by 50% and you sell your warrants when the stock reaches $30.00 per share.
A) 37.5%
B) 87.5%
C) 137.5%
D) 237.5%
E) 337.5%
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16
Chapter 15: Equity Portfolio Management Strategies
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Sample Questions
Q1) ____ is a strategy used because the market seems to reward companies that have steady, above average earnings growth, or whose prices are rising because of market optimism.
A) Relative strength
B) Asset momentum
C) Rotational attribution
D) All of the above.
E) None of the above.
Q2) Exchange-Traded Funds (ETF) are depository receipts that give investors a pro rata claim on the capital gains and cash flows of securities held by financial institutions.
A)True
B)False
Q3) Which of the following is not considered an active management strategy?
A) Sector rotation
B) Use of factor models
C) Quantitative screens
D) Full replication
E) Linear programming
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Chapter 16: Bond Portfolio Management Strategies
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Sample Questions
Q1) Refer to Exhibit 16-2. The value of the swap is ____ basis points in one year.
A) 18.4
B) 23.3
C) 49.1
D) 46.5
E) 46.8
Q2) Refer to Exhibit 16-10. Calculate the price of Bond B.
A) $974.69
B) $990.64
C) $995.22
D) $1,013.88
E) $1,025.77
Q3) Refer to Exhibit 16-8. Calculate the modified duration for Bond C.
A) 4.47
B) 4.22
C) 4.34
D) 5
E) None of the above
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) Open-end mutual funds that charge a sales fee when the fund is initially offered to the investor are known as
A) Balance funds.
B) Deferred sales loads.
C) Unit investment trusts.
D) Load funds.
E) Contingency funds.
Q2) An investment vehicle that acts like a mutual fund of hedge funds, and allows investors access to managers that might otherwise be unavailable is known as
A) Managed futures funds
B) Long-short equity funds
C) Fund of funds
D) Private equity funds
E) Leveraged Buyouts (LBOs)
Q3) An investor should be cautious when selecting a fund based solely on the manager's past performance, since past performance may not be repeated in the future.
A)True
B)False
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Chapter 18: Evaluation of Portfolio Performance
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Q1) Attribution analysis separates a portfolio manager's performance into an allocation effect and selection effect.
A)True
B)False
Q2) Sharpe's performance assumes that all portfolios are completely diversified.
A)True
B)False
Q3) Refer to Exhibit 18-2. According to the Treynor Measure, which portfolio performed best?
A) W
B) X
C) Y
D) Z
E) Two portfolios are tied
Q4) A negative Treynor measure (negative T) for a portfolio always indicates that the portfolio would plot below the SML.
A)True
B)False
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Chapter 19: Analysis of Financial Statements
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Q1) Cash flow from operations = Net Income + Non cash revenue and expensesChanges in net working capital.
A)True
B)False
Q2) Refer to Exhibit 19-4. Calculate the sustainable growth rate.
A) 27.8%
B) 30.4%
C) 20.4%
D) 24.8%
E) 17.8%
Q3) Refer to Exhibit 19-4. Calculate the return on equity (ROE).
A) 20.4%
B) 17.8%
C) 22.4%
D) 27.8%
E) 30.4%
Q4) Financial ratios can be used to estimate systematic risk. A)True B)False
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Chapter 20: An Introduction to Security Valuation
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Q1) If the estimated value of an asset is greater than the market price, you would want to buy the investment.
A)True
B)False
Q2) What is the value of a 10% semi-annual coupon bond with a par value of $1,000 that matures in 5 years and has a required rate of return of 9%?
A) $1,021.95
B) $1,038.90
C) $1,039.56
D) $1,064.18
E) $1,078.23
Q3) The beta for the DAK Corporation is 1.25. If the yield on 30 year T-bonds is 5.65%, and the long term average return on the S&P 500 is 11%. Calculate the required rate of return for DAK Corporation.
A) 12.34%
B) 7.06%
C) 13.74%
D) 5.35%
E) 5.65%
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Chapter 21: Web Appendix: A Review of Statistics and the
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Q1) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q2) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q3) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
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Chapter
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Q1) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
Q2) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q3) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
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Chapter
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Q1) Banks have high liquidity needs and therefore, have a short time horizon.
A)True
B)False
Q2) Many endowments are tax-exempt.
A)True
B)False
Q3) Banks must compete for funds (savings deposits, CDs, etc.) in order to make loans and other types of investments.
A)True
B)False
Q4) Banks typically have short-term investment horizons because
A) They have a strong need for liquidity.
B) They offer short-term deposit accounts.
C) They are required to by federal and state laws.
D) Choices a and b
E) All of the above
Q5) Banks face regulatory constraints at both the state and federal level.
A)True
B)False
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