Questions and Answers of Investment Analysis Portfolio

The line depicting the risk and return of portfolio combinations of a risk-free asset and any risky asset is the:A. Security market line.B. Capital allocation line.C. Security characteristic line.
The portfolio of a risk-free asset and a risky asset has a better risk–return tradeoff than investing in only one asset type because the correlation between the risk-free asset and the risky asset
With respect to capital market theory, an investor’s optimal portfolio is the combination of a risk-free asset and a risky asset with the highest:A. Expected return.B. Indifference curve.C. Capital
Highly risk-averse investors will most likely invest the majority of their wealth in:A. Risky assets.B. Risk-free assets.C. The optimal risky portfolio.
The capital market line, CML, is the graph of the risk and return of portfolio combinations consisting of the risk-free asset and:A. Any risky portfolio.B. The market portfolio.C. The leveraged
Which of the following statements most accurately defines the market portfolio in capital market theory? The market portfolio consists of all:A. Risky assets.B. Tradable assets.C. Investable assets.
With respect to capital market theory, the optimal risky portfolio:A. Is the market portfolio.B. Has the highest expected return.C. Has the lowest expected variance.
Relative to portfolios on the CML, any portfolio that plots above the CML is considered:A. Inferior.B. Inefficient.C. Unachievable.
A portfolio on the capital market line with returns greater than the returns on the market portfolio represents a(n):A. Lending portfolio.B. Borrowing portfolio.C. Unachievable portfolio.
With respect to the capital market line, a portfolio on the CML with returns less than the returns on the market portfolio represents a(n):A. Lending portfolio.B. Borrowing portfolio.C. Unachievable
Which of the following types of risk is most likely avoided by forming a diversified portfolio?A. Total risk.B. Systematic risk.C. Nonsystematic risk.
Which of the following events is most likely an example of nonsystematic risk?A. A decline in interest rates.B. The resignation of chief executive officer.C. An increase in the value of the U.S.
With respect to the pricing of risk in capital market theory, which of the following statements is most accurate?A. All risk is priced.B. Systematic risk is priced.C. Nonsystematic risk is priced.
The sum of an asset’s systematic variance and its nonsystematic variance of returns is equal to the asset’s:A. Beta.B. Total risk.C. Total variance.
With respect to return-generating models, the intercept term of the market model is the asset’s estimated:A. Beta.B. Alpha.C. Variance.
With respect to return-generating models, the slope term of the market model is an estimate of the asset’s:A. Total risk.B. Systematic risk.C. Nonsystematic risk.
With respect to return-generating models, which of the following statements is most accurate? Return-generating models are used to directly estimate the:A. Expected return of a security.B. Weights of
Which security has the highest total risk?A. Security 1.B. Security 2.C. Security 3.Use the following data to answer question:An analyst gathers the following information: Security Expected Annual
Which security has the highest beta measure?A. Security 1.B. Security 2.C. Security 3.Use the following data to answer question:An analyst gathers the following information: Security Expected Annual
Which security has the least amount of market risk?A. Security 1.B. Security 2.C. Security 3.Use the following data to answer question:An analyst gathers the following information: Security Expected
With respect to capital market theory, the average beta of all assets in the market is:A. Less than 1.0.B. Equal to 1.0.C. Greater than 1.0.
The slope of the security characteristic line is an asset’s:A. Beta.B. Excess return.C. Risk premium.
The graph of the capital asset pricing model is the:A. Capital market line.B. Security market line.C. Security characteristic line.
With respect to capital market theory, correctly priced individual assets can be plotted on the:A. Capital market line.B. Security market line.C. Capital allocation line.
With respect to the capital asset pricing model, the primary determinant of expected return of an individual asset is the:A. Asset’s beta.B. Market risk premium.C. Asset’s standard deviation.
With respect to the capital asset pricing model, which of the following values of beta for an asset is most likely to have an expected return for the asset that is less than the riskfree rate?A.
With respect to the capital asset pricing model, the market risk premium is:A. Less than the excess market return.B. Equal to the excess market return.C. Greater than the excess market return.
With respect to the capital asset pricing model, if the expected market risk premium is 6% and the risk-free rate is 3%, the expected return for Security 1 is closest to:A. 9.0%.B. 12.0%.C. 13.5%.Use
With respect to the capital asset pricing model, if expected return for Security 2 is equal to 11.4% and the risk-free rate is 3%, the expected return for the market is closest to:A. 8.4%.B. 9.0%.C.
With respect to the capital asset pricing model, if the expected market risk premium is 6% the security with the highest expected return is:A. Security 1.B. Security 2.C. Security 3.Use the following
With respect to the capital asset pricing model, a decline in the expected market return will have the greatest impact on the expected return of:A. Security 1.B. Security 2.C. Security 3.Use the
Which of the following performance measures is consistent with the CAPM?A. M-squared.B. Sharpe ratio.C. Jensen’s alpha.
Which of the following performance measures does not require the measure to be compared to another value?A. Sharpe ratio.B. Treynor ratio.C. Jensen’s alpha.
Which of the following performance measures is most appropriate for an investor who is not fully diversified?A. M-squared.B. Treynor ratio.C. Jensen’s alpha.
Analysts who have estimated returns of an asset to be greater than the expected returns generated by the capital asset pricing model should consider the asset to be:A. Overvalued.B. Undervalued.C.
With respect to capital market theory, which of the following statements best describes the effect of the homogeneity assumption? Because all investors have the same economic expectations of future
With respect to capital market theory, which of the following assumptions allows for the existence of the market portfolio? All investors:A. Are price takers.B. Have homogeneous expectations.C. Plan
The intercept of the best fit line formed by plotting the excess returns of a manager’s portfolio on the excess returns of the market is best described as Jensen’s:A. Beta.B. Ratio.C. Alpha.
Portfolio managers who are maximizing risk-adjusted returns will seek to invest more in securities with:A. Lower values of Jensen’s alpha.B. Values of Jensen’s alpha equal to 0.C. Higher values
Portfolio managers, who are maximizing risk-adjusted returns, will seek to invest less in securities with:A. Lower values for nonsystematic variance.B. Values of nonsystematic variance equal to 0.C.
A Japanese institutional investor has a portfolio valued at f10 billion. The investor expresses his first risk objective as a desire not to lose more than f1 billion in the coming 12-month period.
Henri Gascon is an energy trader who works for a major French oil company based in Paris. He is 30 years old and married with one son, aged five. Gascon has decided that it is time to review his
Henri Gascon is so pleased with the services provided by the financial adviser, that he suggests to his brother Jacques that he should also consult the adviser. Jacques thinks it is a good idea.
Having assessed his risk tolerance, Henri Gascon now begins to discuss his retirement income needs with the financial adviser. He wishes to retire at age 50, which is 20 years from now. His salary
1. Frank Johnson is investing for retirement and has a 20-year horizon. He has an average risk tolerance. Which investment is likely to be the least suitable for a major allocation in Johnson’s
Henri Gascon continues to discuss his investment requirements with the financial adviser. The financial adviser begins to draft the constraints section of the IPS.Gascon expects that he will continue
The strategic asset allocations of many institutional investors make a distinction between domestic equities and international equities, or between developed market equities and emerging market
ABP is a pension fund with approximately 2.6 million members. It manages a defined benefit scheme for civil servants in the Netherlands, and its goal is to pay out a “real”pension (i.e., one that
The Standard & Poor’s Depositary Receipts (SPDRs) is an exchange-traded fund in the United States that is designed to track the S&P 500 stock market index. The current price of a share of SPDRs is
Suppose that a speculative-grade bond issuer announces, just before bond markets open, that it will default on an upcoming interest payment. In the announcement, the issuer confirms various reports
1. An analyst estimates that a security’s intrinsic value is lower than its market value.The security appears to be:A. Undervalued.B. Fairly valued.C. Overvalued.2. A market in which assets’
The expected effect on market efficiency of opening a securities market to trading by foreigners would be to:A. Decrease market efficiency.B. Leave market efficiency unchanged.C. Increase market
In an efficient market, the change in a company’s share price is most likely the result of:A. Insiders’ private information.B. The previous day’s change in stock price.C. New information coming
Regulation that restricts some investors from participating in a market will most likely:A. Impede market efficiency.B. Not affect market efficiency.C. Contribute to market efficiency.
With respect to efficient market theory, when a market allows short selling, the efficiency of the market is most likely to:A. Increase.B. Decrease.C. Remain the same.
Which of the following regulations will most likely contribute to market efficiency?Regulatory restrictions on:A. Short selling.B. Foreign traders.C. Insiders trading with nonpublic information.
Which of the following market regulations will most likely impede market efficiency?A. Restricting traders’ ability to short sell.B. Allowing unrestricted foreign investor trading.C. Penalizing
If markets are efficient, the difference between the intrinsic value and market value of a company’s security is:A. Negative.B. Zero.C. Positive.
The intrinsic value of an undervalued asset is:A. Less than the asset’s market value.B. Greater than the asset’s market value.C. The value at which the asset can currently be bought or sold.
The market value of an undervalued asset is:A. Greater than the asset’s intrinsic value.B. The value at which the asset can currently be bought or sold.C. Equal to the present value of all the
With respect to the efficient market hypothesis, if security prices reflect only past prices and trading volume information, then the market is:A. Weak-form efficient.B. Strong-form efficient.C.
Which one of the following statements best describes the semistrong form of market efficiency?A. Empirical tests examine the historical patterns in security prices.B. Security prices reflect all
If markets are semistrong efficient, standard fundamental analysis will yield abnormal trading profits that are:A. Negative.B. Equal to zero.C. Positive.
If prices reflect all public and private information, the market is best described as:A. Weak-form efficient.B. Strong-form efficient.C. Semistrong-form efficient.
If markets are semistrong-form efficient, then passive portfolio management strategies are most likely to:A. Earn abnormal returns.B. Outperform active trading strategies.C. Underperform active
If a market is semistrong-form efficient, the risk-adjusted returns of a passively managed portfolio relative to an actively managed portfolio are most likely:A. Lower.B. Higher.C. The same.
Technical analysts assume that markets are:A. Weak-form efficient.B. Weak-form inefficient.C. Semistrong-form efficient.
Fundamental analysts assume that markets are:A. Weak-form inefficient.B. Semistrong-form efficient.C. Semistrong-form inefficient.
If a market is weak-form efficient but semistrong-form inefficient, then which of the following types of portfolio management is most likely to produce abnormal returns?A. Passive portfolio
An increase in the time between when an order to trade a security is placed and when the order is executed most likely indicates that market efficiency has:A. Decreased.B. Remained the same.C.
With respect to efficient markets, a company whose share price reacts gradually to the public release of its annual report most likely indicates that the market where the company trades is:A.
Which of the following is least likely to explain the January effect anomaly?A. Tax-loss selling.B. Release of new information in January.C. Window dressing of portfolio holdings.
If a researcher conducting empirical tests of a trading strategy using time series of returns finds statistically significant abnormal returns, then the researcher has most likely found:A. A market
Which of the following market anomalies is inconsistent with weak-form market efficiency?A. Earnings surprise.B. Momentum pattern.C. Closed-end fund discount.
Researchers have found that value stocks have consistently outperformed growth stocks.An investor wishing to exploit the value effect should purchase the stock of companies with above-average:A.
With respect to rational and irrational investment decisions, the efficient market hypothesis requires:A. Only that the market is rational.B. That all investors make rational decisions.C. That some
Observed overreactions in markets can be explained by an investor’s degree of:A. Risk aversion.B. Loss aversion.C. Confidence in the market.
Like traditional finance models, the behavioral theory of loss aversion assumes that investors dislike risk; however, the dislike of risk in behavioral theory is assumed to be:A. Leptokurtic.B.
Investors should use a portfolio approach to:A. Reduce risk.B. Monitor risk.C. Eliminate risk.
Which of the following is the best reason for an investor to be concerned with the composition of a portfolio?A. Risk reduction.B. Downside risk protection.C. Avoidance of investment disasters.
With respect to the formation of portfolios, which of the following statements is most accurate?A. Portfolios affect risk less than returns.B. Portfolios affect risk more than returns.C. Portfolios
Which of the following institutions will on average have the greatest need for liquidity?A. Banks.B. Investment companies.C. Non-life insurance companies.
Which of the following institutional investors will most likely have the longest time horizon?A. Defined benefit plan.B. University endowment.C. Life insurance company.
A defined benefit plan with a large number of retirees is likely to have a high need for:A. Income.B. Liquidity.C. Insurance.
Which of the following institutional investors is most likely to manage investments in mutual funds?A. Insurance companies.B. Investment companies.C. University endowments.
With respect to the portfolio management process, the asset allocation is determined in the:A. Planning step.B. Feedback step.C. Execution step.
The planning step of the portfolio management process is least likely to include an assessment of the client’s:A. Securities.B. Constraints.C. Risk tolerance.
With respect to the portfolio management process, the rebalancing of a portfolio’s composition is most likely to occur in the:A. Planning step.B. Feedback step.C. Execution step.
An analyst gathers the following information for the asset allocations of three portfolios:Which of the portfolios is most likely appropriate for a client who has a high degree of risk tolerance?A.
Which of the following investment products is most likely to trade at their net asset value per share?A. Exchange-traded funds.B. Open-end mutual funds.C. Closed-end mutual funds.
Which of the following financial products is least likely to have a capital gain distribution?A. Exchange-traded funds.B. Open-end mutual funds.C. Closed-end mutual funds.
Which of the following forms of pooled investments is subject to the least amount of regulation?A. Hedge funds.B. Exchange-traded funds.C. Closed-end mutual funds.
Which of the following pooled investments is most likely characterized by a few large investments?A. Hedge funds.B. Buyout funds.C. Venture capital funds.
London Arbitrageurs, PLC, employs many analysts who devise and implement trading strategies. Mr. Brown is trying to evaluate three trading strategies that have been used for different periods of
Assume that as a U.S. investor, you decide to hold a portfolio with 80 percent invested in the S&P 500 U.S. stock index and the remaining 20 percent in the MSCI Emerging Markets index. The expected
Assume that you are given an investment with an expected return of 10 percent and a risk (standard deviation) of 20 percent, and your risk aversion coefficient is 3.1. What is your utility of this
Based on investment information given next and the utility formula U = E(r) – 0.5Aσ2, answer the following questions. Returns and standard deviations are both expressed as percent per year. When
Two stocks have the same return and risk (standard deviation): 10 percent return with 20 percent risk. You form a portfolio with 50 percent each of stock 1 and stock 2 to examine the effect of
An investor is considering investing in a small-cap stock fund and a general bond fund.Their returns and standard deviations are given next and the correlation between the two fund returns is 0.10.1.
In Exhibit 5-24, the risk and return of the points marked are as follows:Answer the following questions with reference to the points plotted on Exhibit 5-24 and explain your answers. The investor is

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