Asset Management Review Questions
Course Introduction
Asset Management is a comprehensive course that introduces students to the principles and practices involved in managing financial and physical assets within various organizational contexts. The course covers key topics such as asset allocation, risk assessment, portfolio construction, performance evaluation, and regulatory frameworks. Emphasizing both theoretical foundations and practical applications, students will learn about the roles of asset managers, investment strategies, and techniques for optimizing returns while managing risk. Through case studies, industry examples, and current trends, the course prepares students to make informed decisions regarding asset selection, monitoring, and long-term value maximization in both personal and institutional investment settings.
Recommended Textbook
Investments Analysis and Management 13th Edition by Charles P. Jones
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Page 2
Chapter 1: Understanding Investments
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Q1) Underlying all investments is the tradeoff between:
A)expected return and actual return.
B)low risk and high risk.
C)actual return and high risk.
D)expected return and risk.
Answer: D
Q2) A 25-year old college graduate is participating in a 401(k)retirement plan and wishes to minimize risk by eliminating stock-based mutual funds and other equities from his investment portfolio.What will this probably do to his ending retirement funds in 40 years?
Answer: If he minimizes risk,then he will also minimize return.His retirement fund will likely be much smaller than if he chose to take more risk over the long run.
Q3) Financial planners must pass a standardized test and possess certain credentials. A)True
B)False
Answer: False
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Chapter 2: Investment Alternatives
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Q1) Bonds trade on an accrual interest basis.This means an investor:
A)can sell a bond at any time without losing the interest that has accrued.
B)can buy a bond at any time and gain the interest accrued from the time of the last payment.
C)can sell a bond at any time and retain the interest portion of the bond.
D)can buy a bond at any time and receive an immediate interest check.
Answer: A
Q2) The return on a zero-coupon bond is derived from the difference between the purchase price of the bond and its par value.
A)True
B)False
Answer: True
Q3) The premium on an option is the:
A)par value of the option.
B)price of the option.
C)book value of the option.
D)price at which a security may be bought or sold using the option.
Answer: B
Q4) How is the earnings retention rate related to the dividend payout rate?
Answer: Earnings retention rate = 1-dividend payout rate
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Chapter 3: Indirect Investing
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Sample Questions
Q1) Load funds generally outperform no-load funds.
A)True
B)False
Answer: False
Q2) A portfolio of directly-owned individual securities guided by an investment manager is known as a(n):
A)IRA.
B)IMA.
C)SMA.
D)DCA. Answer: C
Q3) Single-country funds have traditionally:
A)outperformed international funds.
B)underperformed international funds.
C)been open-end.
D)been closed-end. Answer: D
Q4) Briefly explain the fees charged by mutual funds.
Answer: Load fees are sales charges,management fees include advisory fees and operating expenses,and 12b-1 fees are marketing expenses.
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Chapter 4: Securities Markets and Market Indexes
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Q1) The NASDAQ 100 Composite Index is a value-weighted index.
A)True
B)False
Q2) Which of the following is a major difference between the S&P 500 Index and the Dow Jones Industrial Average (DJIA)?Relative to the DJIA,the S&P 500:
A)includes stocks with a much smaller average market capitalization.
B)includes more foreign firms.
C)is a much broader index.
D)is more stable.
Q3) What are the major advantages of a private placement for the issuer of securities?
Q4) In-house trading refers to:
A)trades made only on the floor of the exchanges.
B)direct trades made between OTC dealers.
C)trades by fund managers without the use of brokers or exchanges.
D)trades made between specialists on the NYSE.
Q5) The DJIA is a _______-weighted index.
Q6) The S&P 500 comprises approximately ___ percent of the market capitalization of all U.S.publicly traded companies.
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Chapter 5: How Securities Are Traded
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Sample Questions
Q1) A sell stop order is placed:
A)above the current price.
B)below the current price.
C)at the current price.
D)at the breakeven point.
Q2) Investors who sell short are expecting the price of the security to fall.
A)True
B)False
Q3) Trading delays and trading halts are types of circuit breakers employed by the NYSE. A)True
B)False
Q4) Below what stock price will a margin call occur?
A)$13.50
B)$54.00
C)$42.00
D)$18.00
Q5) What is the rationale for different margin requirements on different types of securities?(For example,50 percent on common stock,and 30 percent on bonds)
Q6) What is the chief advantage of a market order?
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Chapter 6: The Risks and Returns From Investing
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Sample Questions
Q1) Total return is equal to:
A)capital gain + price change.
B)yield + income.
C)capital gain - loss.
D)yield + price change.
Q2) It is generally easier to predict interest rate risk than market risk.
A)True
B)False
Q3) Assume you are a U.S.citizen who purchases $20,000 worth of bonds of the Deep Shaft Mining Company in Kenya.What sources of risk can you identify with this investment?
Q4) Which of the following statements about the expected equity risk premium is true?
A)It is occasionally negative.
B)There is no direct way to measure it.
C)It decreases as investor uncertainty increases.
D)It increases as the risk-free rate increases.
Q5) Return and risk are inversely related.
A)True
B)False
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Chapter 7: Portfolio Theory
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Sample Questions
Q1) Which of the following is true regarding the expected return of a portfolio?
A)It is a weighted average only for stock portfolios.
B)It can only be positive.
C)It can never be above the highest individual asset return.
D)It is always below the highest individual asset return.
Q2) An efficiently diversified portfolio still has _____________________ risk.
Q3) Which of the following portfolios has the least reduction of risk?
A)A portfolio with securities all having positive correlation with each other.
B)A portfolio with securities all having zero correlation with each other.
C)A portfolio with securities all having negative correlation with each other.
D)A portfolio with securities all having skewed correlation with each other.
Q4) The correlation coefficient identifies what causes the relative movement in returns between two securities.
A)True
B)False
Q5) If an analyst uses ex post data to calculate the correlation coefficient and covariance and uses them in the Markowitz model,the assumption is that past relationships will continue in the future.
A)True
B)False
Page 9
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Chapter 8: Portfolio Selection
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Sample Questions
Q1) A portfolio which lies below the efficient frontier is described as:
A)optimal.
B)unattainable.
C)dominant.
D)dominated.
Q2) Academic research shows asset allocation decisions explain approximately 90% of the variation in returns in a portfolio,whereas individual security analysis,including "stock picking," explains only about 10%.
A)True
B)False
Q3) Based on recent history,an investor would have a lower risk level with a portfolio consisting of:
A)all stocks.
B)all bonds.
C)some stocks and some bonds.
D)Impossible to tell.
Q4) What variable is manipulated to determine efficient portfolios,and why are the other variables not changed at will?
Q5) Explain what is efficient about the efficient frontier.
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Chapter 9: Asset Pricing Models
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Sample Questions
Q1) Two points define a straight line.What two points could be most readily identified to estimate the SML?
Q2) Select the correct statement regarding the market portfolio.
A)It is readily and precisely observable.
B)It has no unsystematic risk.
C)It has no systematic risk.
D)It should be composed of stocks or bonds.
Q3) Unlike the CAPM,the APT does not assume borrowing and lending at the risk-free rate.
A)True
B)False
Q4) The APT is based on the law of one price,which states two identical assets cannot sell at different prices.
A)True
B)False
Q5) The Capital Asset Pricing Model:
A)has serious flaws because of its complexity.
B)shows the relationship between risk and expected return.
C)was developed by Markowitz in the 1930s.
D)is a discounted-cash-flow valuation model.
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Chapter 10: Common Stock Valuation
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Sample Questions
Q1) Which of the following is frequently used as a measure of cash flow in the P/CF ratio?
A)Revenue
B)Gross Profit
C)EBITDA
D)Income from continuing operations
Q2) Carl is evaluating a stock that just paid a dividend of $2.00 per share.He expects this dividend to grow by 4% per year,and he has determined that 11% is the appropriate required return.What is the most he should pay for the stock?
A)$18.18
B)$18.91
C)$28.57
D)$29.71
Q3) When using the free cash flow to the firm (FCFF)model,which of the following should be used as the discount rate?
A)The required return on equity
B)The before-tax cost of debt
C)The after-tax cost of equity
D)The weighted average cost of capital
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Chapter 11: Common Stocks: Analysis and Strategy
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Sample Questions
Q1) What is meant by the term "defensive stocks?"Give some examples.
Q2) What is usually considered the biggest risk of market timing?
A)Getting out of the market too soon
B)Generating high transactions costs
C)Failing to adjust for short-term corrections
D)Being out of the market at critical times
Q3) If security prices fully reflect all the relevant information that is available and usable,then the security market is considered to be efficient.
A)True
B)False
Q4) A passive investment strategy attempts to:
A)achieve returns available in various market sectors at minimum risk.
B)achieve maximum returns available in various market sectors.
C)achieve minimum risk in various market sectors.
D)achieve returns available in various market sectors at minimum cost.
Q5) What is the paradox regarding fundamental analysis in regard to the efficient market hypothesis (EMH)?
Q6) Compare and contrast the passive strategies of buy-and-hold and buying index funds.
Page 13
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Chapter 12: Market Efficiency
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Q1) "Event studies" study return patterns around specific events such as stock splits or dividend announcements.
A)True
B)False
Q2) Historically,stock returns for companies with low P/E ratios have been better than returns for stocks with high P/E ratios.
A)True
B)False
Q3) Research suggests company insiders earn abnormal returns on their stock transactions.What does this research mean for the efficient market hypothesis (EMH)?
A)Insider trading has nothing to do with the EMH.
B)Profitable insider trading contradicts all forms of the EMH.
C)Profitable insider trading contradicts only the weak form of the EMH.
D)Profitable insider trading contradicts only the strong form of the EMH
Q4) The SEC has laws to punish insider trading,which implies that the SEC believes in the strong form of the Efficient Market Hypothesis.
A)True
B)False
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14
Chapter 13: Economy Market Analysis
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Sample Questions
Q1) Which of the following types of yield curves is typically considered to be associated with an economic expansion?
A)A steep,upward-sloping yield curve
B)A flat yield curve
C)An inverted yield curve
D)A positively skewed yield curve
Q2) Use the constant-growth dividend discount model to explain why stock prices have an inverse relationship to interest rates.
Q3) Why is the stock market a leading indicator of the economy?Use the constant-growth dividend discount model in your explanation.
Q4) In the U.S. ,since the end of World War II,the typical business cycle contraction has had a duration of:
A)10 months.
B)21 months.
C)32 months.
D)46 months.
Q5) How does the increased globalization of business and finance affect business cycles and the leading,lagging,and coincident economic indicators?
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Chapter 14: Industry Analysis
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Sample Questions
Q1) The North American Industry Classification System (NAICS)was developed using a production-oriented approach,resulting in companies being classified into industries based on the activity in which they are primarily engaged.
A)True
B)False
Q2) What industries do you think will be the growth industries of the next decade?
Q3) What are four basic aspects of qualitative assessment of industries?
Q4) Regarding the qualitative aspects of industry analysis,the breakup of AT&T in 1984 would be considered a:
A)structural change.
B)government effect.
C)competitive effect.
D)cyclical effect.
Q5) The most important point of Michael Porter's analysis is that industry profitability is a function of:
A)economic conditions.
B)the level of interest rates.
C)the industry structure.
D)the industry beta.
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Chapter 15: Company Analysis
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Sample Questions
Q1) In the model P/E=(D /E )/(k - g),the P/E should increase if the dividend payout ratio increases,other things the same.If the payout ratio was intentionally increased by the board of directors,other things are likely not to stay the same.What is likely to happen to the dividend growth rate and the required return?
Q2) Since extraordinary items affecting earnings are typically non-recurring,investors should disregard their impact on earnings when evaluating the stock.
A)True
B)False
Q3) The cash flow statement consists of the following parts:
A)cash holdings from revenue,operations,investing,and financing activities.
B)cash flows from revenue,operations,investing,and financing activities.
C)cash holdings from operations,investing,and financing activities.
D)cash flows from operations,investing,and financing activities.
Q4) A firm's sustainable growth rate can be calculated as the product of:
A) return on assets and the return on equity.
B) dividend payout ratio and leverage.
C) retention rate and the return on equity.
D) net profit margin and asset turnover.
Q5) Should an investor seek companies with low P/Es or high P/Es?
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Chapter 16: Technical Analysis
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Sample Questions
Q1) Technical analysts agree with fundamental analysts regarding the usefulness of accounting data.
A)True
B)False
Q2) The Dow Theory is intended to forecast the start but not the duration of a primary movement.
A)True B)False
Q3) Explain how profit taking and support levels are related.
Q4) Which of the following is a characteristic of the short interest ratio?
A)It is calculated daily as well as weekly.
B)It is often interpreted without any additional information.
C)It has had a value between 2 and 3 in recent times.
D)It is considered to be a measure of investor sentiment.
Q5) Which of the following is generally viewed as a bearish indicator for a stock?
A)It has a relatively high short-interest ratio.
B)Its 50-day moving average price has penetrated the 200-day average from above.
C)Following a price drop,the price penetrates the moving average from below.
D)It has an increasing relative strength ratio.
Q6) What is the advance-decline line?What does it tell the technician?
Page 18
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Chapter 17: Bond Yields
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Sample Questions
Q1) Relative to interest rates,bond prices have:
A)an inverse and linear relationship.
B)a direct and linear relationship.
C)an inverse and convex relationship.
D)an inverse and concave relationship.
Q2) The vast majority of corporate bonds pay floating rates on a quarterly basis.
A)True
B)False
Q3) Based on which of the following term structure theories are forward rates most useful?
A)Expectations theory
B)Liquidity preference theory
C)Preferred habitat theory
D)Market segmentation theory
Q4) Yield spreads vary inversely with the: ______________________________.
Q5) As interest rates increase,long bonds will decrease in price more slowly than shorter bonds.
A)True B)False
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Chapter 18: Bonds: Analysis and Strategy
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Q1) James has a 10-year investment horizon.To achieve an immunized position,his bond portfolio will have an average duration that is:
A)greater than 10 years and have an average maturity that is less than 10 years.
B)equal to 10 years and have an average maturity that is less than 10 years.
C)less than 10 years and have an average maturity that is equal to 10 years.
D)equal to 10 years and have an average maturity that is greater than 10 years.
Q2) Duration is a measure that relates a:
A)bond's price to its time to maturity.
B)bond's price to its coupon rate.
C)bond's yield to maturity to its time to maturity.
D)bond's price to its yield to maturity.
Q3) Which of the following terms describes a change in investors' preferences away from risky assets towards safer bonds?
A)Immunization
B)Flight to safety
C)Laddering
D)Convexity
Q4) Why are upward sloping yield curves more consistent with the usual risk-return tradeoff than downward sloping yield curves?
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Chapter 19: Options
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Sample Questions
Q1) For Grace to maximize her potential return from a bullish view on a stock,she should:
A)buy calls on the stock.
B)write calls on the stock.
C)buy puts on the stock.
D)write puts on the stock.
Q2) What is a hedge ratio?
Q3) A writer of a call can terminate the contract before expiration by:
A)writing a second call.
B)buying a put.
C)buying a comparable call.
D)writing a put.
Q4) An option buyer has three courses of action available: write a similar option to close the position,exercise the option,or let the option expire unexercised.
A)True
B)False
Q5) What organizational feature of options trading prevents individual traders from having to worry about defaults if options are exercised?
Q6) What is meant by portfolio insurance?
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Chapter 20: Futures
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Q1) Most futures contracts are settled by delivery.
A)True
B)False
Q2) An investor who sells a T-bond futures contract is expecting to profit from:
A)an increase in the price of the T-bond.
B)an increase in the level of interest rates.
C)interest rates remaining unchanged.
D)the coupon payments from the T-bond.
Q3) When trading futures,margin:
A)is seldom used.
B)indicates that credit is being extended.
C)serves as a down payment.
D)in effect,is a performance bond.
Q4) Speculators in the futures market:
A)make the market more volatile.
B)contribute liquidity to the market.
C)engage mainly in short positions.
D)serve no real economic function.
Q5) What is meant by the term "marked to market"?
Q6) What are the methods of settling a futures contract?
Page 22
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Chapter 21: Portfolio Management
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Q1) Under the life cycle approach,the lowest risk and lowest return should come during the spending and gifting stages.
A)True
B)False
Q2) According to the life-cycle approach,investors normally assume a moderate trade-off between risk and return in the:
A)accumulation phase.
B)consolidation phase.
C)spending phase.
D)gifting phase.
Q3) In order to arrive at an investment policy,it is necessary to determine whether the market is headed for a bull or bear market.
A)True
B)False
Q4) Pension funds are governed by the prudent man rule since specific pension fund legislation has never passed.
A)True
B)False
Q5) How does the prudent investor rule affect asset allocation?
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Chapter 22: Evaluation of Investment Performance
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Q1) The information ratio is calculated as the ratio of:
A)mean active return to tracking risk.
B)alpha to beta.
C)excess return to portfolio standard deviation.
D)portfolio excess return to tracking risk.
Q2) GIPS was created to obtain global acceptance of a standard for fair presentation.
A)True
B)False
Q3) The reward-to-variability ratio (Sharpe ratio)measures:
A)return above the risk-free rate.
B)excess return per unit of total risk.
C)total risk per unit of excess return.
D)return above the risk-free rate relative to beta.
Q4) How is regression analysis used to measure portfolio diversification?
Q5) Investors who have all their assets in one portfolio of securities should rely on the Sharpe measure rather than the Treynor measure.
A)True
B)False
Q6) Discuss how constraints on portfolio managers affect the portfolio results.
Page 24
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