Portfolio Management Final Exam
Course Introduction
Portfolio Management is a comprehensive course that introduces students to the principles, tools, and strategies used to construct, monitor, and optimize investment portfolios. Focusing on both theoretical concepts and practical applications, the course covers asset allocation, diversification, risk-return tradeoffs, and performance measurement. Students will learn to assess investor objectives, conduct security analysis, apply portfolio optimization models, and evaluate portfolio performance. Emphasis is placed on modern portfolio theory, behavioral finance, ethical considerations, and the impact of global economic factors on portfolio decision-making. By the end of the course, students will be equipped to develop and manage portfolios that align with client goals and market conditions.
Recommended Textbook
Essentials of Investments 8th Edition by Zvi Bodie
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22 Chapters
1830 Verified Questions
1830 Flashcards
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Page 2
Chapter 1: Investments: Background and Issues
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Sample Questions
Q1) The process of securitizing poor quality bank loans made to developing nations resulted in the creation of __________.
A) Pass-throughs
B) Brady bonds
C) WEBS
D) FHLMC participation certificates
Answer: B
Q2) Which of the following is not a financial intermediary?
A) a mutual fund
B) an insurance company
C) a real estate brokerage firm
D) a savings and loan company
Answer: C
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Chapter 2: Asset Classes and Financial Instruments
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Sample Questions
Q1) The U.K.stock index is the _________.
A) DAX
B) FTSE
C) GSE
D) TSE
Answer: A
Q2) Which of the following is used to back international sales of goods and services?
A) Certificate of deposit
B) Banker's acceptance
C) Eurodollar deposits
D) Commercial paper
Answer: B
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Chapter 3: Securities Markets
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Sample Questions
Q1) Which Congressional action directed the SEC to implement a national competitive securities market?
A) Securities Act of 1933
B) SEC Act of 1934
C) Securities Act Amendments of 1975
D) Financial Services Modernization Act of 1999
Answer: C
Q2) Registered traders _________________.
A) trade on their own account only
B) perform trades for brokerage firms
C) perform retail trades for the public
D) trade for the government
Answer: A
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Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) You invest in a mutual fund that charges a 3% front end load,1% total annual fees,and a 0% back end load on Class A shares.The same fund charges 0% front end load,1% total annual fees,and a 2% back end load on Class B shares.What are the total fees in year one on a Class A investment of $20,000 with no growth in value?
A) 658
B) 794
C) 885
D) 902
Q2) You pay $21,600 to the Laramie Fund which has a NAV of $18.00 per share at the beginning of the year.The fund deducted a front-end load of 4%.The securities in the fund increased in value by 10% during the year.The fund's expense ratio is 1.3% and is deducted from year end asset values.What is your rate of return on the fund if you sell your shares at the end of the year?
A) 4.35%
B) 4.23%
C) 6.45%
D) 5.63%
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Page 6
Chapter 5: Risk and Return: Past and Prologue
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Sample Questions
Q1) The holding period return on a stock was 32%.Its beginning price was $25 and its cash dividend was $1.50.Its ending price must have been _________.
A) $28.50
B) $33.20
C) $31.50
D) $29.75
Q2) You have an EAR of 9%.The equivalent APR with continuous compounding is _____.
A) 8.47%
B) 8.62%
C) 8.88%
D) 9.42%
Q3) What is the dollar weighted return over the entire time period?
A) 2.87%
B) 0.74%
C) 2.60%
D) 2.21%
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Chapter 6: Efficient Diversification
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Sample Questions
Q1) Beta is a measure of security responsiveness to _________.
A) firm specific risk
B) diversifiable risk
C) market risk
D) unique risk
Q2) Diversification is most effective when security returns are _________.
A) high
B) negatively correlated
C) positively correlated
D) uncorrelated
Q3) Reward-to-variability ratios are ________ on the ________ capital market line.
A) lower; steeper
B) higher; flatter
C) higher; steeper
D) the same; flatter
Q4) The expected rate of return of a portfolio of risky securities is _________.
A) the sum of the securities' covariances
B) the sum of the securities' variances
C) the weighted sum of the securities' expected returns
D) the weighted sum of the securities' variances
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Chapter 7: Capital Asset Pricing and Arbitrage Pricing
Theory
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Sample Questions
Q1) The possibility of arbitrage arises when ____________.
A) there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily
B) mis-pricing among securities creates opportunities for riskless profits
C) two identically risky securities carry the same expected returns
D) investors do not diversify
Q2) Consider the CAPM.The expected return on the market is 18%.The expected return on a stock with a beta of 1.2 is 20%.What is the risk-free rate?
A) 2%
B) 6%
C) 8%
D) 12%
Q3) According to the capital asset pricing model,fairly priced securities have
A) negative betas
B) positive alphas
C) positive betas
D) zero alphas
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Chapter 8: The Efficient Market Hypothesis
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Sample Questions
Q1) Fundamental analysis determines that the price of a firm's stock is too low,given its intrinsic value.The information used in the analysis is available to all market participants,yet the price does not seem to react.The stock does not trade on a major exchange.What concept might explain the ability to produce excess returns on this stock?
A) January effect
B) Neglected firm effect
C) P/E effect
D) Reversal effect
Q2) Evidence by Blake,Elton and Gruber indicates that on average actively managed bond funds
A) outperform passive fixed-income indexes __________.
B) under perform passive fixed-income indexes by a wide margin
C) perform as well as passive fixed-income indexes
D) under perform passive fixed-income indexes by an amount equal to fund expenses
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Chapter 9: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) An accumulation of cash by mutual funds may be viewed by technical traders as a __________ indicator.
A) bullish
B) neutral
C) bearish
D) trend reversal
Q2) The price of a stock fluctuates over a period of 10 days.The movement of the stock price below the 10 day minimum price of $25 triggers a rash of selling.The $25 price might now be considered the _______________.
A) congestion area
B) penetration point
C) resistance level
D) support level
Q3) A major problem with technical trading strategies is that ________.
A) it is very difficult to identify a true trend before the fact
B) it is very difficult to identify the correct trend after the fact
C) it is so easy to identify trends that all investors quickly do so
D) Kondratieff showed that you can't identify trends without 48 to 60 years of data
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Chapter 10: Bond Prices and Yields
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Sample Questions
Q1) You purchased a 5-year annual interest coupon bond one year ago.Its coupon interest rate was 6% and its par value was $1,000.At the time you purchased the bond,the yield to maturity was 4%.If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%,your annual total rate of return on holding the bond for that year would have been approximately _________.
A) 5.0%
B) 5.5%
C) 7.6%
D) 8.9%
Q2) You buy a bond with a $1,000 par today for a price of $875.The bond has 6 years to maturity and makes annual coupon payments of $75 per year.You hold the bond to maturity but you do not reinvest any of your coupons.What was your effective EAR over the holding period?
A) 10.40%
B) 9.57%
C) 7.45%
D) 8.78%
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Page 12
Chapter 11: Managing Bond Portfolios
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Sample Questions
Q1) A bond portfolio manager notices a hump in the yield curve at the five year point.How might a bond manager take advantage of this event?
A) Buy the 5 year bonds and short the surrounding maturity bonds
B) Buy the 5 year bonds and buy the surrounding maturity bonds
C) Short the 5 year bonds and short the surrounding maturity bonds
D) Short the 5 year bonds and buy the surrounding maturity bonds
Q2) A bond has a maturity of 12 years,a duration of 9.5 years at a promised yield rate of 8%.What is the bond's modified duration?
A) 12 years
B) 11.1 years
C) 9.5 years
D) 8.8 years
Q3) A bond with a 9-year duration is worth $1,080.00 and its yield to maturity is 8%.If the yield to maturity falls to 7.84%,you would predict that the new value of the bond will be
A) $1,035
B) $1,036
C) $1,094
D) $1,124
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Page 13
Chapter 12: Macroeconomic and Industry Analysis
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Sample Questions
Q1) The average duration of unemployment is _________.
A) a leading economic indicator
B) a coincidental economic indicator
C) a lagging economic indicator
D) both coincidental and lagging
Q2) The Board of Governors of the Federal Reserve System are appointed by ____________ to serve _____________ terms.
A) the Senate; 10 year
B) the House of Representatives; 8 year
C) the President; 14 year
D) the Secretary of the Treasury; 6 year
Q3) Pharmaceuticals,food,and other necessities would be good performers during the ____ stage of the business cycle.
A) peak
B) contraction
C) trough
D) expansion
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Chapter 13: Equity Valuation
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Sample Questions
Q1) A firm has a stock price of $55 per share and a P/E ratio of 75.If you buy the stock at this P/E and earnings fail to grow at all,how long should you expect it to take to just recover the cost of your investment?
A) 27 years
B) 37 years
C) 55 years
D) 75 years
Q2) Brevik Builders has an expected ROE of 25%.Its dividend growth rate will be __________ if it follows a policy of paying 30% of earning in the form of dividends.
A) 5.0%
B) 15.0%
C) 17.5%
D) 45.0%
Q3) Earnings yields tend to _______ when Treasury yields fall.
A) fall
B) rise
C) remain unchanged
D) fluctuate wildly
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Chapter 14: Financial Statement Analysis
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Sample Questions
Q1) Depreciation expense is in what broad category of expenditures?
A) Cost of goods sold
B) General and administrative expenses
C) Debt interest expense
D) Tax expenditures
Q2) What is the net cash provided by or used in financing activities of Haven Hardware?
A) ($10,000)
B) ($120,000)
C) $10,000
D) $120,000
Q3) Which of the following is not a ratio used in the DuPont analysis?
A) Interest burden
B) Profit margin
C) Asset turnover
D) Earnings yield ratio
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16
Chapter 15: Options Markets
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Sample Questions
Q1) You buy a call option and a put option on General Electric.Both the call option and the put option have the same exercise price and expiration date.This strategy is called a
A) time spread
B) long straddle
C) short straddle
D) money spread
Q2) A European put option gives its holder the right to _________.
A) buy the underlying asset at the exercise price on or before the expiration date
B) buy the underlying asset at the exercise price only at the expiration date
C) sell the underlying asset at the exercise price on or before the expiration date
D) sell the underlying asset at the exercise price only at the expiration date
Q3) Longer term American style options with maturities of up to three years are called
A) warrants
B) LEAPS
C) GICs
D) CATs
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Chapter 16: Option Valuation
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Sample Questions
Q1) Investor A bought a call option that expires in 6 months.Investor B wrote a put option with a 9 month maturity.All else equal as the time to expiration approaches the value of Investor A's position will _______ and the value of Investor B's position will _______.
A) increase; increase B) increase; decrease C) decrease; increase
D) decrease; decrease
Q2) A higher dividend payout policy will have a __________ impact on the value of a put and a __________ impact on the value of a call.
A) negative; negative
B) negative; positive
C) positive; negative
D) positive; positive
Q3) Using the Black-Scholes OPM,the call option should be worth __________ today.
A) $2.50
B) $2.94
C) $3.26
D) $3.50
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18
Chapter 17: Futures Markets and Risk Management
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Sample Questions
Q1) The Student Loan Marketing Association (SLMA)has short term student loans funded by long term debt.To hedge out this interest rate risk SLMA could ______________.
I.engage in a swap to pay fixed and receive variable interest payments
II.engage in a swap to pay variable and receive fixed interest payments
III.buy T-bond futures
IV.sell T-bond futures
A) I and II only
B) I and IV only
C) II and III only
D) II and IV only
Q2) At maturity of a future contract,the spot price and futures price must be approximately the same because of __________.
A) marking to market
B) the convergence property
C) the open interest
D) the triple witching hour
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Chapter 18: Portfolio Performance Evaluation
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Sample Questions
Q1) A portfolio generates an annual return of 16%,a beta of 1.2 and a standard deviation of 19%.The market index return is 12% and has a standard deviation of 16%.What is Jensen's alpha of the portfolio if the risk free rate is 6%?
A) .017
B) .028
C) .036
D) .078
Q2) The __________ calculates the reward to risk trade-off by dividing the average portfolio excess return by the portfolio beta.
A) Sharpe measure
B) Treynor measure
C) Jensen measure
D) appraisal ratio
Q3) Which of the following investment strategies would have produced the highest returns in the time period since 1926?
A) T bills portfolio
B) S&P 500 index fund
C) Perfect market timing
D) Random stock selection
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Page 20
Chapter 19: Globalization and International Investing
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Sample Questions
Q1) 25 countries with largest equity capitalization made up about _____ of the word GDP in 2007.
A) 22%
B) 44%
C) 75%
D) 85%
Q2) After one year,the exchange rate is $1.60/ and the share price is 55.What is the dollar-denominated return?
A) 25.7%
B) 16%
C) 14.3%
D) 9.3%
Q3) EAFE stands for _______.
A) Equity And Foreign Exchange
B) European, Australian, Far East
C) European, Asian, Foreign Exchange
D) European, American, Far East
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Chapter 20: Hedge Funds
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Sample Questions
Q1) A hedge fund has $150 million in assets at the beginning of the year and 10 million shares outstanding throughout the year.Throughout the year assets grow at 12%.The fund charges 3% management fee on assets.The fee is imposed on year end asset values.What is the end of year NAV for the fund?
A) $15.00
B) $15.60
C) $16.30
D) $17.55
Q2) Portfolio A has a beta of 0.2 and an expected return of 14%.Portfolio B has a beta of 0.5 and an expected return of 16%.The risk-free rate of return is 10%.If you manage a long/short equity fund and wanted to take advantage of an arbitrage opportunity,you should take a short position in portfolio ______ and a long position in portfolio
A) A; A
B) A; B
C) B; A
D) B; B
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Page 22
Chapter 21: Taxes,inflation,and Investment Strategy
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Sample Questions
Q1) An investor who is in the 35% federal tax bracket and the 5% state bracket buys a 6.5% yield corporate bond.What is his after tax yield?
A) 3.90%
B) 4.75%
C) 6.50%
D) 9.90%
Q2) What is John's total cost of his 5% contribution?
A) $2,100 cost
B) $2,800 cost
C) $700 benefit
D) $3500 benefit
Q3) What is John's effective salary reduction if he is in the 25% tax bracket?
A) $2,100
B) $2,800
C) $5,600
D) $8,400
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Chapter 22: Investors and the Investment Process
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Sample Questions
Q1) If the maturity of a bank's assets is much longer than the maturity of its liabilities and it wants to limit its interest rate risk the bank may _________.
A) prefer to invest in long term bonds in its asset portfolio
B) prefer to invest in equities in its asset portfolio
C) prefer to invest in variable rate assets
D) decide to increase its fixed rate mortgage holdings
Q2) Life insurance companies try to hedge the risks inherent in whole-life insurance policies by investing in __________.
A) long term bonds
B) money market mutual funds
C) savings accounts
D) short term commercial paper
Q3) To _____ means to mitigate a financial risk.
A) invest
B) speculate
C) hedge
D) renege
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