Portfolio Management
Pre-Test Questions
Course Introduction
Portfolio Management is a comprehensive course that explores the principles and techniques involved in constructing and overseeing investment portfolios to achieve specific financial objectives. The course covers essential concepts such as asset allocation, diversification, risk assessment, and performance evaluation. Students examine various asset classes including equities, fixed income, and alternative investments and learn how to balance risk and return in response to market conditions and investor goals. Practical case studies and real-world scenarios equip students with the analytical tools required for optimal portfolio selection, ongoing management, and adaptation to changing market dynamics. The course also introduces modern portfolio theory and evaluates contemporary approaches in portfolio optimization and risk management.
Recommended Textbook
Investment Analysis and Portfolio Management 11th Edition by Frank K. Reilly
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22 Chapters
2045 Verified Questions
2045 Flashcards
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Page 2
Chapter 1: The Investment Setting
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Sample Questions
Q1) The nominal risk-free rate of interest is a function of the
A) real risk-free rate and the investment's variance.
B) prime rate and the rate of inflation.
C) T-bill rate plus the inflation rate.
D) tax free rate plus the rate of inflation.
E) real risk-free rate and the rate of inflation.
Answer: E
Q2) Refer to Exhibit 1.9. Calculate the risk premium for the market portfolio.
A) 4.5%
B) 8.25%
C) 4.75%
D) 3.5%
E) 0%
Answer: C
Q3) Investors are willing to forgo current consumption in order to increase future consumption for a nominal rate of interest.
A)True
B)False
Answer: False
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Page 3
Chapter 1: The Investment Setting: Part A
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Sample Questions
Q1) Refer to Exhibit 1A.2. The expected return for project X is
A) 0.0 percent.
B) 0.5 percent.
C) 2.5 percent.
D) 5.0 percent.
E) 7.5 percent.
Answer: C
Q2) Refer to Exhibit 1A.2. The standard deviation for project X is
A) -1.581 percent.
B) 0.000 percent.
C) 1.581 percent.
D) 2.738 percent.
E) 5.000 percent.
Answer: B
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Chapter 2: Asset Allocation and Security Selection
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77 Flashcards
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Sample Questions
Q1) In constructing the portfolio, the manager should maximize the investor's risk level.
A)True
B)False
Answer: False
Q2) Once the portfolio is constructed, it must be continuously
A) rebalanced.
B) recycled
C) reinvested
D) monitored.
E) manipulated.
Answer: D
Q3) Experts suggest life insurance coverage should be seven to ten times an individual's annual salary.
A)True
B)False
Answer: True
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Page 5
Chapter 2: Asset Allocation and Security Selection: Part A
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3 Flashcards
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Sample Questions
Q1) What is the correlation coefficient for two assets with a covariance of .0032, if asset 1 has a standard deviation of 12 percent and asset 2 has a standard deviation of 9 percent?
A) 0.2963
B) 0.3456
C) 0.8721
D) 1.5980
Q2) Refer to Exhibit 2A.1. Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
Q3) Refer to Exhibit 2A.1. Calculate the coefficient of correlation.
A) -0.456
B) -0.354
C) 0.000
D) 0.456
E) 3.538
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Page 6
Chapter 3: Organization and Functioning of Securities Markets
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87 Flashcards
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Sample Questions
Q1) Refer to Exhibit 3.2. How many shares of RC can Heidi buy?
A) 2,500
B) 2,000
C) 1,000
D) 500
E) 250
Q2) The NYSE is a dealer market.
A)True
B)False
Q3) Margin transaction involves borrowing part of the cost of an investment.
A)True
B)False
Q4) Refer to Exhibit 3.8. What is your annual rate of return on this investment?
A) 18 percent
B) 24 percent
C) 25 percent
D) 36 percent
E) 37 percent
Page 7
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Chapter 4: Security Market Indexes and Index Funds
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89 Flashcards
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Sample Questions
Q1) Refer to Exhibit 4.6. Compute the geometric mean of the price change of Stocks Q, R, and S from days T to T + 1.
A) 9.32 percent
B) 10.14 percent
C) 15.57 percent
D) 30.63 percent
E) 54.37 percent
Q2) The NYSE series should have higher rates of return and risk measures than the AMEX and OTC series.
A)True
B)False
Q3) Which of the following is NOT a use of security market indicator series?
A) to use as a benchmark of individual portfolio performance
B) to develop an index portfolio
C) to determine factors influencing aggregate security price movements
D) to use in the measurement of systematic risk
E) to use in the measurement of diversifiable risk
Q4) The major U.S. stock indexes are highly correlated.
A)True
B)False
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Chapter 5: Efficient Capital Markets, Behavioral Finance, and Technical Analysis
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162 Verified Questions
162 Flashcards
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Sample Questions
Q1) Refer to Exhibit 5.3. What is the abnormal rate of return for Elliot during period t using only the aggregate market return (ignore differential systematic risk)?
A) 1.50
B) 1.10
C) -1.50
D) -5.10
E) -8.00
Q2) The following are classified as contrary trading rules EXCEPT
A) odd lot short sales.
B) investment advisory opinions.
C) relative OTC volume.
D) CBOE put/call ratio.
E) confidence index.
Q3) Results from studies on the effects of unexpected world events have consistently indicated that the price change is so rapid that it takes place between the close of one day and the opening of the next day.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management
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114 Flashcards
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Sample Questions
Q1) A risk-free asset is one in which the return is completely guaranteed; there is no uncertainty.
A)True
B)False
Q2) If you borrow money at the RFR and invest the money in the market portfolio, the rate of return on your portfolio will be higher than the market rate of return.
A)True
B)False
Q3) Refer to Exhibit 6.9. What is the standard deviation of this portfolio?
A) 5.16%
B) 5.89%
C) 6.11%
D) 6.57%
E) 7.02%
Q4) The introduction of lending and borrowing severely limits the available risk/return opportunities.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management: Part A
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2 Flashcards
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Sample Questions
Q1) Refer to Exhibit 6A.1. What weight of security 1 gives the minimum portfolio variance when r<sub>1.2</sub> = .60, E( \(\sigma\)1) = .10 and E( \(\sigma\)2) = .16?
A) .0244
B) .3679
C) .5697
D) .6309
E) .9756
Q2) Refer to Exhibit 6A.1. Show the minimum portfolio variance for a two-stock portfolio when r<sub>1.2</sub> = 1.
A) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) -E( \(\sigma\)2)]
B) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
C) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
D) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
E) None of these are correct.
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11
Chapter 6: An Introduction to Portfolio Management: Part B
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Sample Questions
Q1) Refer to Exhibit 6B.1. Show the minimum portfolio variance for a portfolio of two risky assets when r<sub>1.2</sub> = -1.
A) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
B) E( \(\sigma\)1) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
C) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) + E( \(\sigma\)2)]
D) E( \(\sigma\)2) \(\div\) [E( \(\sigma\)1) - E( \(\sigma\)2)]
E) None of these are correct.
Q2) Refer to Exhibit 6B.1. What is the value of W<sub>1</sub> when r<sub>1.2</sub> = -1 and E( \(\sigma\)1) = .10 and E( \(\sigma\)2) = .12?
A) 45.46 percent
B) 50.00 percent
C) 59.45 percent
D) 54.55 percent
E) 74.55 percent
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12
Chapter 7: Asset Pricing Models
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152 Flashcards
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Sample Questions
Q1) Which of the following is NOTa relaxation of the assumptions for the CAPM?
A) differential lending and borrowing rates
B) a zero-beta model
C) transaction costs
D) taxes
E) fixed planning periods
Q2) Using the S&P index as the proxy market portfolio when evaluating a portfolio manager relative to the SML will tend to underestimate the manager's performance.
A)True
B)False
Q3) CML and SML measure total risk by the standard deviation of the investment.
A)True
B)False
Q4) The planning period for the CAPM is the same length of time for every investor.
A)True
B)False
Q5) Securities with returns that lie below the security market line are undervalued.
A)True
B)False
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Chapter 8: Equity Valuation
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Sample Questions
Q1) Many analysts recommend that you should read an annual report forwards, that is, you would read the footnotes last.
A)True
B)False
Q2) The growth rate of equity earnings without external financing is equal to
A) retention rate plus return on equity.
B) retention rate minus return on equity.
C) retention rate divided by return on equity.
D) retention rate times return on equity.
E) return on equity divided by retention rate.
Q3) Using the constant growth model, a decrease in the required rate of return from 15 to 13 percent combined with an increase in the growth rate from 5 to 6 percent would cause the price to
A) rise more than 50 percent.
B) rise less than 50 percent.
C) remain constant.
D) fall more than 50 percent.
E) fall less than 50 percent.
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Chapter 9: The Top-Down Approach to Market, Industry, and Company Analysis
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216 Verified Questions
216 Flashcards
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Sample Questions
Q1) The authors of the text prefer forward valuation ratios as opposed to historical valuation variables in relative valuation methods.
A)True
B)False
Q2) 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
Q3) A defensive company is one whose sales, earnings, and cash flows are strongly correlated with the business cycle.
A)True
B)False
Q4) If, for the S&P Industrials Index, the profit margin was .25 and the equity turnover ratio was 12, the ROE would be
A) 0.83 percent.
B) 0.48 percent.
C) 3.00 percent.
D) 30.00 percent.
E) 48.00 percent.
To
Chapter 10: The Practice of Fundamental Investing
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60 Flashcards
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Sample Questions
Q1) The goal of _____ is to convince an investor to buy a stock or to sell a stock short.
A) corporate governance
B) capital allocation
C) executive compensation
D) going public
E) the stock pitch
Q2) The preliminary prospectus is often referred to as a/an _____
A) SEC form S-1.
B) red herring.
C) registration statement.
D) winner's curse.
E) green shoe.
Q3) A company goes public for many reasons, including that the original investors and the management team would like liquidity.
A)True
B)False
Q4) CEO compensation is often used to try to remedy the principal-agent conflict.
A)True
B)False
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Chapter 11: Equity Portfolio Management Strategies
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Sample Questions
Q1) Completeness funds are portfolios designed to complement active portfolios that do not cover the entire market.
A)True
B)False
Q2) The strategy that is used to determine the long-term policy asset weights in a portfolio is called
A) integrated asset allocation.
B) tactical asset allocation.
C) sector rotation.
D) strategic asset allocation.
E) insured asset allocation.
Q3) There is a direct relationship between a passive portfolio's tracking error relative to its index and the time and expense necessary to create and maintain the portfolio.
A)True
B)False
Q4) An advantage of quadratic programming is that it relies on historical correlations.
A)True
B)False
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Chapter 12: Bond Fundamentals and Valuation
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138 Flashcards
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Sample Questions
Q1) Institutional investors typically account for about
A) 90 to 95 percent of bond market trading.
B) 40 to 50 percent of bond market trading.
C) 10 to 15 percent of bond market trading.
D) less than 5 percent of bond market trading.
E) less than 1 percent of bond market trading.
Q2) The importance of the reinvestment assumption increases with a ____ coupon and a ____ term to maturity.
A) low, short
B) low, long
C) high, short
D) high, long
E) zero, very long
Q3) If the coupon payments are not reinvested during the life of the issue then the
A) promised yield is greater than realized yield.
B) promised yield is less than realized yield.
C) nominal yield declines.
D) nominal yield is greater than promised yield.
E) current yield equals the yield to maturity.
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Page 18
Chapter 13: Bond Analysis and Portfolio Management Strategies
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Sample Questions
Q1) Calculate the duration of a 6 percent, $1,000 par bond maturing in three years if the yield to maturity is 10 percent and interest is paid semiannually.
A) 1.35 years
B) 1.78 years
C) 2.50 years
D) 2.78 years
E) 2.95 years
Q2) Bond price volatility varies directly with the term to maturity and directly with the coupon.
A)True
B)False
Q3) Refer to Exhibit 13.14. Assume that your investment horizon is two years and your portfolio consists only of bonds A and B. What proportion should be invested in each bond to immunize the portfolio?
A) Invest 72.4 percent in bond A and 27.6 percent in bond B.
B) Invest 68.3 percent in bond A and 31.7 percent in bond B.
C) Invest 58.5 percent in bond A and 41.5 percent in bond B.
D) Invest 31.7 percent in bond A and 68.3 percent in bond B.
E) Invest 27.6 percent in bond A and 72.4 percent in bond B.
Page 19
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Chapter 14: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) Which of the following does NOT influence the option price?
A) past stock price
B) up and down factors u and d
C) risk free rate
D) exercise price
E) current stock price
Q2) A call option differs from a put option in that
A) a call option obliges the investor to purchase a given number of shares in a specific common stock at a set price; a put obliges the investor to sell a certain number of shares in a common stock at a set price.
B) both give the investor the opportunity to participate in stock market dealings without the risk of actual stock ownership.
C) a call option gives the investor the right to purchase a given number of shares of a specified stock at a set price; a put option gives the investor the right to sell a given number of shares of a stock at a set price.
D) a put option has risk because leverage is not as great as with a call.
E) All of these are correct.
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Page 20
Chapter 15: Forward, Futures, and Swap Contracts
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Sample Questions
Q1) The goal of a hedge transaction is to increase expected returns of a fundamental holding.
A)True
B)False
Q2) A pay-fixed interest rate swap can be viewed as equivalent to
A) a long position in a par-valued FRN and a long position in a par-valued, fixed-rate note.
B) a long position in a par-valued FRN and a short position in a par-valued, fixed-rate note.
C) a short position in a par-valued FRN and a long position in a par-valued, fixed-rate note.
D) a short position in a par-valued FRN and a short position in a par-valued, fixed-rate note.
E) a flat position in a par-valued FRN and a short position in a par-valued, fixed-rate note.
Q3) In the cost of carry model, the inclusion of storage costs will increase the futures price.
A)True
B)False
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Page 21
Chapter 16: Option Contracts
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Sample Questions
Q1) Refer to Exhibit 16.1. How much must an investor pay for one put option contract?
A) $680
B) $815
C) $340
D) $625
E) $590
Q2) All of the following are normal characteristics of a convertible bond, EXCEPT
A) conversion at the option of the issuer.
B) conversion into a fixed number of shares of common stock.
C) a conversion price initially above the market price of the common stock.
D) an interest rate lower than that on straight debentures.
E) subordination.
Q3) In convertible bonds, the value of the common stock price upon immediate conversion is the
A) put-call parity price.
B) conversion parity price.
C) cash equivalent price.
D) convertible price.
E) redemption price.
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Page 22
Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) Refer to Exhibit 24.1. The fund originated by selling $100,000 of stock at $10.00 per share. What is its current NAV?
A) $1.47
B) $14.75
C) $16.03
D) $27.62
E) $234.12
Q2) Income distributions and capital gains distributions are the only source of returns for mutual funds.
A)True
B)False
Q3) High portfolio turnover lowers mutual fund costs.
A)True
B)False
Q4) The market price of shares of a closed-end fund is typically determined by supply and demand.
A)True
B)False
Page 23
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Chapter 18: Evaluation of Portfolio Performance
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111 Flashcards
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Sample Questions
Q1) The policy effect is a difference in bond portfolio performance from that of a benchmark index due to a difference in duration.
A)True
B)False
Q2) A peer group comparison collects the returns produced by a representative universe of investors over a specific period of time and displays them in a simple boxplot format.
A)True B)False
Q3) Treynor's performance measure implicitly assumes a completely diversified portfolio.
A)True
B)False
Q4) Refer to Exhibit 18.9. Calculate CI's risk.
A) 0.1225
B) 0.1000
C) 0.0525
D) 0.0475
E) 0.0325
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Page 24