Course Introduction
Portfolio Theory Test
Questions
Portfolio Theory is a foundational course in finance that explores the principles and techniques used to construct and manage investment portfolios. The course covers the key concepts of risk and return, diversification, asset allocation, and the trade-offs investors face when making portfolio decisions. Students will learn about the efficient frontier, the Capital Asset Pricing Model (CAPM), and the assumptions underlying modern portfolio theory. The course also examines practical methods for evaluating portfolio performance and managing risk, equipping students with the analytical tools necessary to make informed investment choices in both individual and institutional contexts.
Recommended Textbook
Investment Analysis and Portfolio Management 1st Canadian Edition by Frank K. Reilly
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Page 2
Chapter 1: The Investment Setting
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Sample Questions
Q1) The holding period return (HPR) is equal to the holding period yield (HPY) stated as a percentage.
A)True
B)False
Answer: False
Q2) Measures of risk for an investment include
A) Variance of returns and business risk
B) Coefficient of variation of returns and financial risk
C) Business risk and financial risk
D) Variance of returns and coefficient of variation of returns
E) All of the above
Answer: D
Q3) Unsystematic risk refers to risk that is
A) Undiversifiable
B) Diversifiable
C) Due to fundamental risk factors
D) Due to market risk
E) None of the above
Answer: B
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Page 3
Chapter 2: The Asset Allocation Decision
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Sample Questions
Q1) What would the after-tax yield be on an investment that offers a 6% fully taxable yield? Assume a marginal tax rate of 31%.
A) 2.79%
B) 6.48%
C) 4.14%
D) 7.20%
E) 12.50%
Answer: C
Q2) An investment fund, when it is registered like RRSP, will give an investor less after tax dollars at the end of an assumed 20-year time horizon.
A)True
B)False
Answer: False
Q3) The spending phase occurs when investors are relatively young. A)True
B)False Answer: False
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Page 4
Chapter 3: Selecting Investments in a Global Market
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Sample Questions
Q1) In order to diversify risk an investor must have investments that have correlations with other investments in the portfolio that are
A) low positive
B) zero
C) negative
D) any of the above
E) none of the above
Answer: D
Q2) Which of the following is not considered a capital market instrument?
A) Canadian Treasury notes and bonds.
B) Canadian Treasury bills.
C) Canadian government agency securities.
D) Municipal bonds.
E) Corporate bonds.
Answer: B
Q3) A Eurobond is an international bond denominated in a currency other than that of Canada.
A)True
B)False
Answer: False
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Chapter 4: Securities Markets and the Economy
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Sample Questions
Q1) A pure auction market is one in which
A) Dealers provide liquidity by buying and selling shares of stock for themselves.
B) Dealers compete against each other to provide the highest bid and lowest asking prices.
C) Buyers submit bid prices to sellers.
D) Sellers submit ask prices to buyers.
E) Buyers and sellers submit bid and ask prices to a central location to be matched.
Q2) The value of the stocks traded in the over-the-counter market is greater than the values of the stocks traded on the New York Stock Exchange.
A)True
B)False
Q3) Refer to Exhibit 4-5. What is your rate of return on the investment?
A) 10.48%
B) 12.87%
C) -13.98%
D) -24.49%
E) -15.05%
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6
Chapter 5: Efficient Capital Markets
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Sample Questions
Q1) Refer to Exhibit 5-2. 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%
Q2) The random walk hypothesis contends that stock prices occur randomly.
A)True
B)False
Q3) A portfolio manager without superior analytical skills should
A) Determine and quantify the risk preferences of a client.
B) Minimize transaction costs.
C) Maintain the specified risk level.
D) Ensure that the portfolio is completely diversified.
E) All of the above.
Q4) An efficient market requires a large number of profit-maximizing investors.
A)True
B)False
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) Refer to Exhibit 6-13. Calculate the standard deviation for Magnum Oil.
A) 0%
B) 11%
C) 16%
D) 20%
E) 26%
Q2) Combining assets that are not perfectly correlated does affect both the expected return of the portfolio as well as the risk of the portfolio.
A)True
B)False
Q3) A portfolio manager is considering adding another security to his portfolio. The correlations of the five alternatives available are listed below. Which security would enable the highest level of risk diversification?
A) 0.0
B) 0.25
C) -0.25
D) -0.75
E) 1.0
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8
Chapter 7: Asset Pricing Models: Capm and Apt
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Sample Questions
Q1) Refer to Exhibit 7-8. Assume that you wish to create a portfolio with no net wealth invested and the portfolio that achieves this has 50% in stock X, -100% in stock Y, and 50% in stock Z. What is the net arbitrage profit?
A) $8
B) $5
C) $7
D) $12
E) $15
Q2) Since many of the assumptions made by the capital market theory are unrealistic, the theory is not applicable in the real world.
A)True
B)False
Q3) A completely diversified portfolio would have a correlation with the market portfolio that is
A) Equal to zero because it has only unsystematic risk.
B) Equal to one because it has only systematic risk.
C) Less than zero because it has only systematic risk.
D) Less than one because it has only unsystematic risk.
E) Less than one because it has only systematic risk.
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Page 9
Chapter 8: Economic and Industry Analysis
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Sample Questions
Q1) In the rapid accelerating growth stage, profit margins are typically very high.
A)True
B)False
Q2) At the initial stage of an economic recovery,
A) financial stock rise on expectations of increases in loan demand, housing constructions and security offerings.
B) consumer durable stocks rise on expectations of rising consumer confidence and personal income.
C) capital goods stocks rise on expectation of increases in business capital spending.
D) basic materials stocks rise on expectation of rising profit margins.
E) consumer staple stocks rise on expectations that consumers will continue to spend on necessities.
Q3) At what stage in the industrial life cycle is there an influx of competition?
A) Early pioneering development
B) Rapid accelerating growth
C) Acquisition and consolidation
D) Mature growth
E) Stabilization and market maturity
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Chapter 9: Company Analysis and Stock Valuation
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Sample Questions
Q1) A growth company is one that has the ability to
A) Acquire capital at a low cost and is able to invest in projects that yield an average return.
B) Acquire capital at a low cost and is able to invest in projects that yield a below average return.
C) Acquire capital at an average cost and is able to invest in projects that yield an above average return.
D) Acquire capital at an average cost and is able to invest in projects that yield an average return.
E) Acquire capital at an above average cost and is able to invest in projects that yield an average return.
Q2) Refer to Exhibit 9-5. What are the expected sustainable growth rates for Wal-Blue and its industry?
A) 25.2% and 15.0%
B) 30.0% and 17.5%
C) 25.2% and 17.5%
D) 27.5% and 12.5%
E) 30.0% and 15.0%
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Chapter 10: Technical Analysis
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Sample Questions
Q1) What is a type of charting which normally disregards both time and volume?
A) Bar chart.
B) Point and figure chart.
C) Pie chart.
D) Histogram.
E) Linear regression graph.
Q2) Based on the daily closings for the S&P/TSX Composite Index given in the table below, calculate a four-day moving average for Day 4. \[\begin{array} { c c } \text { Day } & \text { Price } \\ \hline 1 & 10500 \\ 2 & 10025 \\ 3 & 10125 \\ 4 & 10210
\end{array}\]
A) 10,500
B) 10,210
C) 10,215
D) 10,000
E) 11,000
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Page 12
Chapter 11: Bond Fundamentals
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Sample Questions
Q1) A major source of risk faced by CMO issues is
A) Default risk.
B) Prepayment risk.
C) Counterparty risk.
D) Choices a and b.
E) Choices a, b and c.
Q2) A 4.75% coupon bond issued by the provincial government of Quebec sells for $1,000. What coupon rate on a corporate bond selling at $1,000 par value would produce the same after tax return to the investor as the tax-free municipal bond if the investor is in the 28% marginal tax bracket?
A) 1.1%
B) 5.8%
C) 6.6%
D) 7.3%
E) 9.7%
Q3) All U.S. municipalities are required to buy insurance when they issue bonds.
A)True
B)False
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13
Chapter 12: The Analysis and Valuation of Bonds
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Sample Questions
Q1) According to the segmented-market hypothesis a rising yield curve indicates that A) demand for long term bonds has fallen and demand for short term bonds has fallen.
B) demand for long term bonds has risen and demand for short term bonds has fallen.
C) demand for long term bonds has fallen and demand for short term bonds has risen.
D) demand for long term bonds has risen and demand for short term bonds has risen.
E) None of the above.
Q2) Calculate the duration of a 6%, $1,000 par bond maturing in three years if the yield to maturity is 10% 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
Q3) An interest rate is the price of loanable funds.
A)True
B)False
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Chapter 13: An Introduction to Derivative Markets and Securities
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Sample Questions
Q1) Datacorp stock currently trades at $50. August call options on the stock with a strike price of $55 are priced at $5.75. October call options with a strike price of $55 are priced at $6.25. Calculate the value of the time premium between the August and October options.
A) -$0.50
B) $0
C) $0.50
D) $5
E) -$5
Q2) A straddle is the simultaneous purchase (or sale) of a put and call option with the same underlying asset,
A) Same exercise price, and expiration date.
B) Same exercise price but different expiration date.
C) Same expiration date but different exercise price.
D) All of the above.
E) None of the above.
Q3) The forward market has low liquidity relative to the futures market.
A)True
B)False
15
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Chapter 14: Derivatives: Analysis and Valuation
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Sample Questions
Q1) The Chicago Board Options Exchange has the largest share of stock option trading.
A)True
B)False
Q2) Refer to Exhibit 14-4. Find the payoff if LIBOR closes at 7.8%.
A) $0.00
B) $25,000.00
C) $50,000.00
D) -$25,000.00
E) -$50,000.00
Q3) Index options can only be settled in cash.
A)True
B)False
Q4) Index options are settled by delivery of the stocks that make up the index.
A)True
B)False
Q5) There is an inverse relationship between the market interest rate and the value of a call option.
A)True
B)False
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Chapter 15: Equity Portfolio Management Strategies
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Sample Questions
Q1) Growth stocks would have the following characteristics
A) Low price/book, high price/earnings.
B) Low price/book, low price/earnings.
C) High EPS growth, high profitability.
D) Low EPS growth, high profitability.
E) None of the above.
Q2) An advantage of quadratic programming is that it relies on historical correlations.
A)True
B)False
Q3) In backtesting, computers are used to examine the composition and returns of portfolios based on historical data in order to determine if the investment strategy would have worked in the past.
A)True
B)False
Q4) 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: Bond Portfolio Management Strategies
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Sample Questions
Q1) Refer to Exhibit 16-10. Calculate the Modified Duration for Bond A.
A) 0.98
B) 1.79
C) 1.90
D) 1.93
E) 2.31
Q2) Interest rate anticipation is one of the matched funding techniques that matches anticipated interest rates with the required rates on a portfolio.
A)True
B)False
Q3) A substitution swap relies heavily on interest rate expectations.
A)True
B)False
Q4) In a buy-and-hold strategy, bonds are purchased in light of the investor's objectives and constraints and then held until maturity.
A)True
B)False
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry
Ethics
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Sample Questions
Q1) Closed-end investment companies never sell at discounts to their NAV.
A)True
B)False
Q2) Refer to Exhibit 17-1. 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
Q3) In the case of closed-end investment companies, shares of the company
A) Trade on the secondary market.
B) Can be bought from or sold to the investment company at the NAV.
C) Are determined by supply and demand.
D) Choices a and c.
E) Choices b and c.
Q4) Hedge funds have no limitations on when and how often capital can be contributed or removed from the partnership.
A)True
B)False
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Chapter 18: Evaluation of Portfolio Performance
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Sample Questions
Q1) Components of overall portfolio performance include
A) Selectivity.
B) Manager's risk.
C) Security risk.
D) Choices a and b.
E) Choices a, b, and c.
Q2) Information ratio portfolio performance measures
A) Adjust portfolio risk to match benchmark risk.
B) Compare portfolio returns to expected returns under CAPM.
C) Evaluate portfolio performance on the basis of return per unit of risk.
D) Indicate historic average differential return per unit of historic variability of differential return.
E) None of the above.
Q3) Refer to Exhibit 18-11. Compute the Treynor Measure for the C fund.
A) 0.012
B) 0.040
C) 0.069
D) 0.396
E) 1.142
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Page 20
Chapter 19: Analysis of Financial Statements
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Sample Questions
Q1) Refer to Exhibit 19-3. Calculate the inventory turnover ratio.
A) 27.23
B) 23.3
C) 55.43
D) 8.67
E) 11.67
Q2) Refer to Exhibit 19-5. Calculate the return on equity (ROE).
A) 15%
B) 12%
C) 32%
D) 9%
E) 7%
Q3) Refer to Exhibit 19-5. Calculate the operating margin.
A) 15.5%
B) 5.6%
C) 8.6%
D) 10.6%
E) 6.5%
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21
Chapter 20: An Introduction to Security Valuation
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Sample Questions
Q1) Refer to Exhibit 20-6. What is the future price of the stock in year 5?
A) $113.40
B) $122.47
C) $132.27
D) $142.85
E) $154.35
Q2) Refer to Exhibit 20-4. How much should you be willing to pay for the stock if you require a 17% return?
A) $16.97
B) $22.16
C) $21.32
D) $32.63
E) $23.63
Q3) The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries and 3) analysis of industry influences.
A)True
B)False
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22
Chapter 21: Web Appendix: A Review of Statistics and the
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Sample Questions
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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Sample Questions
Q1) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
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 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 23: Appendix: Objectives and Constraints of Institutional Investors
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Sample Questions
Q1) 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
Q2) Non-life insurance companies have somewhat unpredictable cash outflows and are therefore faced with different investment constraints than life insurance companies.
A)True
B)False
Q3) Banks face regulatory constraints at both the state and federal level.
A)True
B)False
Q4) Cash flows for nonlife insurance companies, such as property and casualty, are similar to cash flows of life insurance companies.
A)True
B)False
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