Portfolio Management
Pre-Test Questions
Course Introduction
Portfolio Management is a course designed to equip students with the foundational theories, tools, and strategies essential for effectively managing investment portfolios. The course covers topics such as asset allocation, diversification, risk-return analysis, portfolio optimization, and performance evaluation. Students will explore modern portfolio theory, efficient market hypothesis, and behavioral finance, along with practical applications involving equities, fixed income, and alternative investments. Through case studies and hands-on exercises, students gain the analytical skills necessary to construct, monitor, and rebalance portfolios in line with clients objectives and market conditions.
Recommended Textbook
Analysis of Investments and Mangement of Portfolios International 10th Edition by Reilly
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Chapter 1: An Overview of the Investment Process
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Q1) 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
Q2) The rate of exchange between future consumption and current consumption is
A) The nominal risk-free rate.
B) The coefficient of investment exchange.
C) The pure rate of interest.
D) The consumption/investment paradigm.
E) The expected rate of return.
Answer: C
Q3) The holding period return (HPR)is equal to the holding period yield (HPY)stated as a percentage.
A)True
B)False
Answer: False
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Chapter 2: The Asset Allocation Decision
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Sample Questions
Q1) For an investor with a time horizon of 12 years and higher risk tolerance,an appropriate asset allocation strategy would be
A) 100% stocks
B) 30% cash, 50% bonds, and 20% stocks
C) 10% cash, 30% bonds, and 60% stocks
D) 50% bonds and 50% stocks
E) 100% bonds
Answer: A
Q2) It is not a good idea to get too specific when constructing your policy statement.
A)True
B)False
Answer: False
Q3) Term life insurance provides both a death benefit and a savings plan.
A)True
B)False
Answer: False
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Chapter 3: The Global Market Investment Decision
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Sample Questions
Q1) The correlation of returns between a single pair of countries remains constant over time.
A)True
B)False
Answer: False
Q2) REITS are investment companies that invest in high-quality money market instruments such as Treasury bills,high-grade commercial paper,and large CD's.
A)True
B)False
Answer: False
Q3) The relative size of U.S.financial markets to the total investable assets in the global capital markets has grown considerably over the last three decades.
A)True
B)False
Answer: False
Q4) A call option is usually issued in conjunction with convertible bonds.
A)True
B)False
Answer: False
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Chapter 4: Securities Markets: Organization and Operation
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Sample Questions
Q1) Which of the following is <b>not </b>a characteristic of shelf registrations? Shelf registrations:
A) Were introduced by Rule 415.
B) Allow large firms to register security issues and sell them piecemeal during the following six years.
C) Provide flexibility and reduce registration fees and expenses.
D) Are typically used for the sale of straight debentures rather than common stock or convertible issues.
E) All of the above are characteristics of shelf registrations.
Q2) Informational efficiency is where the cost of acquiring information is very cheap. A)True B)False
Q3) The value of the stocks traded in the over-the-counter market is greater than the combined values of the stocks traded on the New York Stock Exchange and the American Stock Exchange combined. A)True B)False
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Chapter 5: Security-Market Indexes
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Sample Questions
Q1) Refer to Exhibit 5.5.Calculate the percentage return in the price weighted series for the period Dec 31,2000 to Dec 31,2004.
A) 12.68%
B) 20.00%
C) 21.76%
D) 33.33%
E) 40.00%
Q2) Refer to Exhibit 5.1.Assume that a stock price-weighted indicator consisted of the four issues with their prices.What are the values of the stock indicator for Day T and T + 1 and what is the percentage change?
A) 36.25, 38.75, 6.9%
B) 38.75, 36.25, -6.9%
C) 100, 106.9, 6.9%
D) 107.48, 106.33, 1.15%
E) None of the above
Q3) A bond market index is easier to create than a stock market index because the universe of bonds is much broader than that of stocks.
A)True
B)False
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Chapter 6: Efficient Capital Markets
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Sample Questions
Q1) Based on Stock Z's beta of 0.9 the normal return is 9%.However,the actual return for Stock Z was 8%.What is Stock Z's abnormal rate of return?
A) -1.0%
B) -0.1%
C) 0.1%
D) 1.0%
E) 1.1%
Q2) Refer to Exhibit 6.2.What is the abnormal rate of return for Stock XYZ during period t using only the aggregate market return (ignore differential systematic risk)?
A) -3.2%
B) 2.4%
C) 2.0%
D) 1.3%
E) -1.5%
Q3) The weak-form efficient market hypothesis assumes all publicly available information is reflected in current stock prices.
A)True
B)False
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Chapter 7: An Introduction to Portfolio Management
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Q1) Refer to Exhibit 7.9.What is the standard deviation of this portfolio?
A) 5.16%
B) 5.89%
C) 6.11%
D) 6.57%
E) 7.02%
Q2) A good portfolio is a collection of individually good assets.
A)True
B)False
Q3) Refer to Exhibit 7.13.Calculate the expected return for Magnum Oil.
A) 5.0
B) 10.3%
C) 13.7%
D) 17.5%
E) 20.0%
Q4) The correlation coefficient and the covariance are measures of the extent to which two random variables move together.
A)True B)False
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Chapter 8: An Introduction to Asset Pricing Models
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Sample Questions
Q1) 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
Q2) Refer to Exhibit 8.1.Compute the intercept of the characteristic line for RA Computer.
A) -9.41 B) 11.63 C) 4.92 D) -4.92 E) -7.98
Q3) Tobin's separation theory states that the market is a separate investment from the risk-free security.
A)True B)False
Q4) The standard deviation for the risk-free security is equal to zero.
A)True B)False
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Chapter 9: Multifactor Models of Risk and Return
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Sample Questions
Q1) Refer to Exhibit 9.1.In the list above,which are <b>not</b> assumptions of the Arbitrage Pricing model?
A) (1) and (3)
B) (1), (2), and (3)
C) (1), (2), and (5)
D) (2), (4), and (6)
E) All six are assumptions
Q2) Findings by Fama and French that stocks with high Book Value to Market Price ratios tended to produce larger risk adjusted returns than stocks with low Book Value to Market Price ratios challenge the efficacy of the CAPM.
A)True
B)False
Q3) A major advantage of the Arbitrage Pricing Theory is the risk factors are clearly universally identifiable.
A)True
B)False
Q4) Studies strongly suggest that the CAPM be abandoned and replaced with the APT.
A)True
B)False
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Chapter 10: Analysis of Financial Statements
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Q1) Refer to Exhibit 10.1.What is BMC'S operating profit margin?
A) 0.800
B) 0.054
C) 0.080
D) 0.540
E) 5.480
Q2) Business risk is a function of
A) Sales variability.
B) Operating leverage.
C) Financial leverage.
D) a and b.
E) b and c.
Q3) Refer to Exhibit 10.9.Calculate the return on equity (ROE).
A) 31.3%
B) 23.2%
C) 18.4%
D) 13.2%
E) 7.5%
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Chapter 11: Security Valuation Principles
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Sample Questions
Q1) In 2004,Swisten Inc.issued a $150 par value preferred stock that pays an 8 percent annual dividend.Due to changes in the overall economy and in the company's financial condition investors are now requiring an 15 percent return.What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?
A) $80
B) $75
C) $59
D) $95
E) $110
Q2) Dividend growth is a function of
A) Return on equity.
B) The retention rate.
C) The payout ratio.
D) All of the above.
E) None of the above.
Q3) The value of preferred stock can be calculated by dividing its dividend by the required rate of return.
A)True
B)False
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Chapter 12: Macroanalysis and Microvaluation of the Stock Market
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Sample Questions
Q1) An increase in the retention ratio will cause a decrease in the growth rate.
A)True
B)False
Q2) Dividend growth is positively related to the return on equity.
A)True
B)False
Q3) The growth rate will most likely increase if the:
A) Retention ratio decreases
B) Payout ratio decreases
C) Return on equity decreases
D) Net income increases
E) Both a and c
Q4) Refer to Exhibit 12.1.What is your expectation of the market P/E ratio?
A) 8.33
B) 5.33
C) 9.03
D) 6.02
E) 3.24
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Chapter 13: Industry Analysis
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Q1) Which of the following statements concerning the competitive environment is true?
A) High fixed costs encourage firms to produce at a low level of capacity, in order to minimize fixed cost per unit produced.
B) Low current prices relative to costs in an industry indicate low barriers to entry.
C) Substantial economies of scale do not give a current industry member an advantage over a new firm.
D) The ability to substitute another product limits the industry's profit potential.
E) Buyers and suppliers do not influence the profitability of an industry.
Q2) A number of factors affect the cash flow and risk prospects of different industries.Which of the following is <b>not </b>such a factor?
A) Demographics
B) Life-styles
C) Technology
D) Politics
E) None of the above (that is, all are factors to be considered)
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Chapter 14: Company Analysis and Stock Valuation
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Q1) The sustainable growth rate can be calculated by taking the dividend payout ratio time return on equity (ROE).
A)True
B)False
Q2) Underpriced stocks can be ranked using the excess return ratio which is calculated as the Market price/Risk free rate.
A)True
B)False
Q3) In a(n)____ strategy,a firm seeks to identify itself as unique within its industry.
A) Defensive
B) Offensive
C) Low-cost
D) Differentiation
E) None of the above
Q4) A cyclical company's sales and earnings are heavily influenced by aggregate business activity.
A)True
B)False
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Page 16
Chapter 15: Equity Portfolio Management Stragtegies
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Sample Questions
Q1) Refer to Exhibit 15.1.The recommended portfolio for Bob Bowman is
A) Portfolio A because it has expected utility of 9.95
B) Portfolio A because it has expected utility of 4.5
C) Portfolio B because it has expected utility of 5.33
D) Portfolio B because it has expected utility of 7.27
E) Portfolio C because it has expected utility of 6.75
Q2) In ____ strategy,certain economic sectors or industries are overweighted relative to the benchmark in anticipation of the next phase of the business cycle.
A) Sector rotation
B) Price momentum
C) Earnings momentum
D) Return rotation
E) None of the above
Q3) Style investing allows control of the total portfolio to be shared between investment managers and pension fund managers.
A)True
B)False
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Chapter 16: Technical Analysis
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Q1) Two major classes of technicians include the contrarians and those who "follow the smart money".
A)True
B)False
Q2) Which of the following assumptions regarding price movements summarized by Levy (1966)are controversial?
A) Supply and demand determine the market value of any good or service.
B) Supply and demand are governed by numerous rational and irrational factors.
C) The prices for individual securities and the overall value of the market tend to move in trends.
D) All of the above assumptions are controversial.
E) None of the above assumptions are controversial.
Q3) The use of trading rules requires a great deal of subjective judgment.
A)True
B)False
Q4) The breadth of the market measures the daily volume for a particular market.
A)True
B)False
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Chapter 17: Bond Fundamentals
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Q1) Which of the following statements regarding Collateralized Debt Obligations (CDOs)is <b>false</b>?
A) CDOs experienced rapid growth since the year 2000.
B) The assets used to back the CDOs are substantially diverse.
C) The credit quality within a CDO at the time of issue is diverse.
D) CDOs have generated significant credit and liquidity problems.
E) All of the above statements are true.
Q2) Issues that provide funds to retire another issue early are known as
A) Bearer bonds
B) Secured debentures
C) Unsecured debentures
D) Revenue bonds
E) Refunding bonds
Q3) Refer to Exhibit 17.1.What is the current yield for this bond?
A) 4.18%
B) 5.88%
C) 4.77%
D) 8.125%
E) 4.063%
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Chapter 18: The Analysis and Valuation of Bonds
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Q1) The price-yield relationship for a bond will become more convex
A) For a low coupon bond.
B) For a high coupon bond.
C) For a long maturity bond.
D) b and c.
E) a and c.
Q2) Consider a bond with a 9% coupon and a current yield of 8 1/2%.What is this bond's price?
A) $1058.82
B) $1009.00
C) $1085.00
D) $1062.44
E) $1077.96
Q3) The three major theories explaining the term structure of interest rates are the expectations hypothesis,the liquidity differential hypothesis,and the segmented quality hypothesis.
A)True
B)False
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Chapter 19: Bond Portfolio Management Strategies
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Q1) Refer to Exhibit 19.7.Calculate the value of swap out of Bond A into Bond B.
A) 0.41%
B) 1.73%
C) 0.23%
D) 0.00%
E) 0.51%
Q2) If an investor swaps identical issues to establish a loss,the loss is disallowed and the transaction is known as a
A) Switch sale.
B) Wash sale.
C) Green shoe.
D) Flashback.
E) White knight.
Q3) Refer to Exhibit 19.8.Calculate the modified duration for Bond D.
A) 9.5
B) 9.8
C) 9.2
D) 15
E) None of the above
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Chapter 20: An Introduction to Derivative Markets and Securities
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Q1) A stock currently trades at $110.June put options on the stock with a strike price of $100 are priced at $5.25.Calculate the dollar return on one put contract.
A) -$525
B) $1000
C) $0
D) -$1000
E) $525
Q2) The CBOE brought numerous innovations to the option market,which of the following is<b> not </b>such an innovation?
A) Creation of a central marketplace
B) Creation of a non-liquid secondary option market
C) Introduction of a Clearing Corporation
D) Standardization of all expiration dates
E) Standardization of all exercise prices
Q3) A primary function of futures markets is to allow investors to transfer risk.
A)True
B)False
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Chapter 21: Forward and Futures Contracts
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Q1) Financial futures include all of the following underlying securities <b>except</b>
A) Stock indexes
B) Treasury bonds
C) Bank deposits
D) Foreign currencies
E) All of the above are examples of underlying securities for financial futures
Q2) Refer to Exhibit 21.3.What is the implied 90-day forward rate at the beginning of the third quarter?
A) 5.10%
B) 5.47%
C) 4.70%
D) 4.85%
E) None of the above
Q3) The basis is the spot price minus the future price.
A)True
B)False
Q4) The cost-of-carry model is useful for pricing future contracts.
A)True
B)False
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Chapter 22: Option Contracts
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Q1) Refer to Exhibit 22.7.What would the net value of a long straddle position be if the stock price at expiration is $35?
A) -7.15
B) -$1.15
C) $1.15
D) $7.15
E) $36.15
Q2) A long strip position indicates that an investor is bullish but conservative.
A)True
B)False
Q3) Refer to Exhibit 22.1.If the spot rate at expiration is $0.75 and the put option was purchased,what is the dollar gain or loss?
A) $0
B) $200 loss
C) $200 gain
D) $3160 gain
E) $1187 loss
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Chapter 23: Swap Contracts,convertible Securities,and
Other Embedded Derivatives
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Q1) The minimum price of a convertible bond is
A) Min (Bond Value, Conversion Value).
B) Max (Bond Value, Conversion Value).
C) Min (Stock Value, Conversion Value).
D) Max (Stock Value, Conversion Value).
E) None of the above.
Q2) The exercise price of The American Dairy Company is $17.You purchase the warrants for $4.00 each when American Dairy's stock price is $20.00 a share.Each warrant entitles you to purchase one share of ADC 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%
Q3) The forward rate agreement is the most complicated of the OTC interest rate contracts.
A)True
B)False
Page 25
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Chapter 24: Professional Money Management, alternative
Assets, and Industry Ethics
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Q1) What type of funds are typically no-load funds that impose no penalty for early withdrawal and generally allow holders to write checks against their account?
A) Mutual funds
B) Open-end funds
C) Closed-end funds
D) Money market funds
E) Balanced funds
Q2) On January 2,2003,you invest $10,000 in Megabucks Mutual Fund,a load fund that charges a fee of 2%.The fund's returns were 13% in 2003,11% in 2004,8% in 2005.On December 31,2005 you redeem all your shares.The dollar value is
A) $13,600.00
B) $13,275.51
C) $13,297.67
D) $13,995.75
E) $10,000.00
Q3) Closed-end investment companies never sell at discounts to their NAV.
A)True
B)False
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Chapter 25: Evaluation of Portfolio Performance
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Q1) The cost of active management is the coefficient sER and it is sometimes referred to as
A) Market timing.
B) Reward for risk.
C) Excess reward.
D) Excess risk.
E) Tracking error.
Q2) A test of bond performance over time indicated that bond portfolio managers are more consistent over time than equity managers.
A)True
B)False
Q3) Refer to Exhibit 25.10.Calculate the percentage return that can be attributed to the asset allocation decision.
A) 0.105%
B) 0.925%
C) 0.20%
D) 0.96%
E) 0.94%
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Chapter 26: Investment Return and Risk Analysis Questions
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Q1) Refer to Exhibit 1A.1.The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q2) Refer to Exhibit 1A.1.The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q3) An investment has a standard deviation of 12 percent and an expected return of 7 percent.What is the coefficient of variation for this investment?
A) 1.714
B) 1.372
C) 0.714
D) 0.583
E) 0.500
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Chapter 27: Investment and Retirement Plans
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Q1) Banks must compete for funds (savings deposits,CD's,etc.)in order to make loans and other types of investments.
A)True
B)False
Q2) Which of the following is <b>not</b> true regarding defined contribution pension plans?
A) Employees make regular contributions to the plan.
B) Employers make regular contributions to the plan.
C) The employer bears all of the investment risk.
D) Benefits are directly related to the earnings of the funds investments.
E) The number of defined contribution plans is increasing.
Q3) In a defined contribution pension plan,
A) The plan does not promise to pay the retiree a specific income stream after retirement.
B) The plan does promise to pay the retiree a specific income stream after retirement.
C) The employee's retirement income is not an obligation of the firm.
D) The company carries the risk of paying future pension benefits to retirees.
E) Choices a and c
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Chapter 28: Calculating Covariance and Correlation
Coefficient of Assets
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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 3A.1.Calculate the coefficient of correlation.
A) -0.456
B) -0.354
C) 0.000
D) 0.456
E) 3.538
Q3) Refer to Exhibit 3A.1.Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
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Chapter 29: Portfolio Variance and Stock Weight
Calculations
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Q1) Refer to Exhibit 7A.1.What weight of security 1 gives the minimum portfolio variance when r<sub>1.2 </sub>= .60,E(?<sub>1</sub>)= .10 and E(?<sub>2</sub>)= .16?
A) .0244
B) .3679
C) .5697
D) .6309
E) .9756
Q2) Refer to Exhibit 7A.1.Show the minimum portfolio variance for a two stock portfolio when r<sub>1.2</sub> = 1.
A) E(?<sub>2</sub>) ¸ [E(?<sub>1</sub>) - E(?<sub>2</sub>)]
B) E(?<sub>2</sub>) ¸ [E(?<sub>1</sub>) + E(?<sub>2</sub>)]
C) E(?<sub>1</sub>) ¸ [E(?<sub>1</sub>) - E(?<sub>2</sub>)]
D) E(?<sub>1</sub>) ¸ [E(?<sub>1</sub>) + E(?<sub>2</sub>)]
E) None of the above
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Chapter 30: Portfolio Optimization with Negative
Correlation: Finding Minimum Variance and Weight
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2 Flashcards
Source URL: https://quizplus.com/quiz/24349
Sample Questions
Q1) Refer to Exhibit 7B.1.Show the minimum portfolio variance for a portfolio of two risky assets when r . = -1.
A) E( 1) ¸ [E( 1) + E( 2)]
B) E( 1) ¸ [E( 1) - E( 2)]
C) E( 2) ¸ [E( 1) + E( 2)]
D) E( 2) ¸ [E( 1) - E( 2)]
E) None of the above
Q2) Refer to Exhibit 7B.1.What is the value of W when r . = -1 and E(s )= .10 and E(s )= .12?
A) 45.46%
B) 50.00%
C) 59.45%
D) 54.55%
E) 74.55%
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