Questions and Answers of Investment Analysis Portfolio

This comprehensive example reviews many concepts learned in this chapter. The example begins with simple information about available assets and builds an optimal investor portfolio for the
Which of the following return calculating methods is best for evaluating the annualized returns of a buy-and-hold strategy of an investor who has made annual deposits to an account for each of the
An investor evaluating the returns of three recently formed exchange-traded funds gathers the following information:The ETF with the highest annualized rate of return is:A. ETF 1.B. ETF 2.C. ETF 3.
With respect to capital market theory, which of the following asset characteristics is least likely to impact the variance of an investor’s equally weighted portfolio?A. Return on the asset.B.
A portfolio manager creates the following portfolio:If the correlation of returns between the two securities is 0.40, the expected standard deviation of the portfolio is closest to:A. 10.7%.B.
A portfolio manager creates the following portfolio:If the covariance of returns between the two securities is 20.0240, the expected standard deviation of the portfolio is closest to:A. 2.4%.B.
If the standard deviation of the portfolio is 14.40%, the correlation between the two securities is equal to:A. 21.0.B. 0.0.C. 1.0.Use the following data to answer Question.A portfolio manager
If the standard deviation of the portfolio is 14.40%, the covariance between the two securities is equal to:A. 0.0006.B. 0.0240.C. 1.0000.Use the following data to answer Question.A portfolio manager
The real rate of return for equities is closest to:A. 5.4%.B. 5.8%.C. 5.9%.Use the following data to answer Question.An analyst observes the following historic geometric returns: Asset Class
The real rate of return for corporate bonds is closest to:A. 4.3%.B. 4.4%.C. 4.5%.Use the following data to answer Question.An analyst observes the following historic geometric returns: Asset Class
The risk premium for equities is closest to:A. 5.4%.B. 5.5%.C. 5.6%.Use the following data to answer Question.An analyst observes the following historic geometric returns: Asset Class Geometric
The risk premium for corporate bonds is closest to:A. 3.5%.B. 3.9%.C. 4.0%.Use the following data to answer Question.An analyst observes the following historic geometric returns: Asset Class
With respect to trading costs, liquidity is least likely to impact the:A. Stock price.B. Bid-ask spreads.C. Brokerage commissions.
Evidence of risk aversion is best illustrated by a risk-return relationship that is:A. Negative.B. Neutral.C. Positive.
With respect to risk-averse investors, a risk-free asset will generate a numerical utility that is:A. The same for all individuals.B. Positive for risk-averse investors.C. Equal to zero for
With respect to utility theory, the most risk-averse investor will have an indifference curve with the:A. Most convexity.B. Smallest intercept value.C. Greatest slope coefficient.
With respect to an investor’s utility function expressed as U =E(r) - 1/2 Aσ2, which of the following values for the measure for risk aversion has the least amount of risk aversion?A. -4B. 0C. 4
A risk-neutral investor is most likely to choose:A. Investment 1.B. Investment 2.C. Investment 3.Use the following data to answer Question.A financial planner has created the following data to
If an investor’s utility function is expressed as U = E(r) - 1/2 Aσ2 and the measure for risk aversion has a value of -2, the risk-seeking investor is most likely to choose:A. Investment 2.B.
If an investor’s utility function is expressed as U =E(r) - 1/2 Aσ2 and the measure for risk aversion has a value of 2, the risk-averse investor is most likely to choose:A. Investment 1.B.
If an investor’s utility function is expressed as U =E(r) - 1/2 Aσ2 and the measure for risk aversion has a value of 4, the risk-averse investor is most likely to choose:A. Investment 1.B.
With respect to the mean-variance portfolio theory, the capital allocation line, CAL, is the combination of the risk-free asset and a portfolio of all:A. Risky assets.B. Equity securities.C. Feasible
Two individual investors with different levels of risk aversion will have optimal portfolios that are:A. Below the capital allocation line.B. On the capital allocation line.C. Above the capital
If the portfolio of the two securities has an expected return of 15%, the proportion invested in security 1 is:A. 25%.B. 50%.C. 75%.Use the following data to answer Question.A portfolio manager
If the correlation of returns between the two securities is –0.15, the expected standard deviation of an equal-weighted portfolio is closest to:A. 13.04%.B. 13.60%.C. 13.87%.Use the following data
If the two securities are uncorrelated, the expected standard deviation of an equalweighted portfolio is closest to:A. 14.00%.B. 14.14%.C. 20.00%.Use the following data to answer Question.A portfolio
As the number of assets in an equally weighted portfolio increases, the contribution of each individual asset’s variance to the volatility of the portfolio:A. Increases.B. Decreases.C. Remains the
With respect to an equally weighted portfolio made up of a large number of assets, which of the following contributes the most to the volatility of the portfolio?A. Average variance of the individual
The correlation between assets in a two-asset portfolio increases during a market decline. If there is no change in the proportion of each asset held in the portfolio or the expected standard
Which pair of assets is perfectly negatively correlated?A. Asset 1 and Asset 2.B. Asset 1 and Asset 3.C. Asset 2 and Asset 3.Use the following data to answer Question.An analyst has made the
If the analyst constructs two-asset portfolios that are equally weighted, which pair of assets has the lowest expected standard deviation?A. Asset 1 and Asset 2.B. Asset 1 and Asset 3.C. Asset 2 and
If the analyst constructs two-asset portfolios that are equally weighted, which pair of assets provides the least amount of risk reduction?A. Asset 1 and Asset 2.B. Asset 1 and Asset 3.C. Asset 2 and
Which of the following statements is least accurate? The efficient frontier is the set of all attainable risky assets with the:A. Highest expected return for a given level of risk.B. Lowest amount of
The portfolio on the minimum-variance frontier with the lowest standard deviation is:A. Unattainable.B. The optimal risky portfolio.C. The global minimum-variance portfolio.
The set of portfolios on the minimum-variance frontier that dominates all sets of portfolios below the global minimum-variance portfolio is the:A. Capital allocation line.B. Markowitz efficient
The dominant capital allocation line is the combination of the risk-free asset and the:A. Optimal risky portfolio.B. Levered portfolio of risky assets.C. Global minimum-variance portfolio.
Compared to the efficient frontier of risky assets, the dominant capital allocation line has higher rates of return for levels of risk greater than the optimal risky portfolio because of the
With respect to the mean-variance theory, the optimal portfolio is determined by each individual investor’s:A. Risk-free rate.B. Borrowing rate.C. Risk preference.
Mr. Miles is a first-time investor and wants to build a portfolio using only U.S. T-bills and an index fund that closely tracks the S&P 500 Index. The T-bills have a return of 5 percent. The S&P 500
Mr. Miles decides to set aside a small part of his wealth for investment in a portfolio that has greater risk than his previous investments because he anticipates that the overall market will
Mr. Miles approaches his broker to borrow money against securities held in his portfolio.Even though Mr. Miles’ loan will be secured by the securities in his portfolio, the broker’s rate for
1. Describe the systematic and nonsystematic risk components of the following assets:A. A risk-free asset, such as a three-month Treasury bill B. The market portfolio, such as the S&P 500, with total
Assuming that the risk (standard deviation) of the market is 25 percent, calculate the beta for the following assets:1. A short-term U.S. Treasury bill.2. Gold, which has a standard deviation equal
1. Alpha Natural Resources (ANR), a coal producer, buys a large but privately held coal producer in China. As a result of the cross-border acquisition of a private company, ANR’s standard deviation
1. Suppose the risk-free rate is 3 percent, the expected return on the market portfolio is 13 percent, and its standard deviation is 23 percent. An Indian company, Bajaj Auto, has a standard
You invest 20 percent of your money in the risk-free asset, 30 percent in the market portfolio, and 50 percent in RedHat, a U.S. stock that has a beta of 2.0. Given that the risk-free rate is 4
GlaxoSmithKline Plc is examining the economic feasibility of developing a new medicine. The initial investment in Year 1 is $$500$ million. The investment in Year 2 is$$200$ million. There is a
A British pension fund has employed three investment managers, each of whom is responsible for investing in one-third of all asset classes so that the pension fund has a well-diversified portfolio.
A Japanese investor is holding the Nikkei 225 index, which is her version of the market.She thinks that three stocks, P, Q, and R, which are not in the Nikkei 225, are undervalued and should form a
As a chief financial officer (CFO) of a large industrial firm, you need to raise cash within a few months to pay for a project to expand existing and acquire new manufacturing facilities. What are
The head of a large labor union with a pension fund asks you, a pension consultant, to distinguish between investing and information-motivated trading. You are expected to provide an explanation that
For a presentation to private wealth clients by your firm’s chief economist, you are asked to prepare the audience by explaining the most fundamental facts concerning the role of interest rates in
How can poor information about the value of a project result in poor capital allocation decisions?
The investment policy of a mutual fund permits the fund to invest only in public equities traded in secondary markets. Would the fund be able to purchase:1. Common stock of a company that trades on a
What factors distinguish fixed-income securities from equities?
Contracts for difference (CFD) allow people to speculate on price changes for an underlying asset, such as a common stock or an index. Dealers generally sell CFDs to their clients. When the clients
An Indonesian gold producer invests in a mine expansion project on the expectation that gold prices will remain at or above 35,000 rupiah per gram when the new project starts producing ore.1. What
NYMEX’s Light Sweet Crude Oil futures contract specifies the delivery of 1,000 barrels of West Texas Intermediate (WTI) Crude Oil when the contract finally settles. A broker requires that its
What feature most distinguishes futures contracts from forward contracts?
What feature most distinguishes a swap contract from a cash-settled forward contract?
What feature most distinguishes option contracts from forward contracts?
Consider the following assets and contracts:1. Which of these represent ownership in corporations?2. Which of these are debt instruments?3. Which of these are created by traders rather than by
What characteristic most likely distinguishes brokers from dealers?
What services do commercial banks provide that make them financial intermediaries?
With respect to providing liquidity to market participants, what characteristics most clearly distinguish dealers from arbitrageurs?
As a relatively new member of the business community, you decide it would be advantageous to join the local lunch club to network with businesspeople. Upon learning that you are a financial analyst,
How is the process of short selling shares of Siemens different from that of short selling a Siemens equity call option contract?
A buyer buys stock on margin and holds the position for exactly one year, during which time the stock pays a dividend. For simplicity, assume that the interest on the loan and the dividend are both
A trader buys stock on margin posting 40 percent of the initial stock price of $20 as equity. The maintenance margin requirement for the position is 25 percent. At what price will a margin call occur?
1. What is the difference between making a market and taking a market?2. What order types are most likely associated with making a market and taking a market?
You are the buy-side trader for a very clever investment manager. The manager has hired a commercial satellite firm to take regular pictures of the parking lots in which new car dealers store their
In what ways do limit and stop instructions differ?
Playtech is a designer, developer, and licensor of software for the gambling industry. On 28 March 2006, Playtech raised approximately d265 million gross through an initial public offering of
In what ways do private placements differ from public placements?
1. What is the main advantage of a call market compared with a continuous trading market?2. What is the main advantage of a continuous trading market compared with a call market?
Before the arrival of a large order, a market has the following limit orders standing on its book:Buyer Tsubasa submits a day order to buy 15 contracts, limit f100.5. With whom does he trade, what is
What are the primary advantages of quote-driven, order-driven, and brokered markets?
As a financial analyst specializing in emerging market equities, you understand that a well-functioning financial system contributes to the economic prosperity of a country.You are asked to start
You are the chief executive officer of a brokerage that is a member of a clearinghouse.A trader who clears through your firm is bankrupt at midday, but you do not yet know it even though your
Akihiko Takabe has designed a sophisticated forecasting model, which predicts the movements in the overall stock market, in the hope of earning a return in excess of a fair return for the risk
James Beach is young and has substantial wealth. A significant proportion of his stock portfolio consists of emerging market stocks that offer relatively high expected returns at the cost of
Lisa Smith owns a manufacturing company in the United States. Her company has sold goods to a customer in Brazil and will be paid in Brazilian real (BRL) in three months.Smith is concerned about the
Which of the following is not a function of the financial system?A. To regulate arbitrageurs’ profits (excess returns).B. To help the economy achieve allocational efficiency.C. To facilitate
An investor primarily invests in stocks of publicly traded companies. The investor wants to increase the diversification of his portfolio. A friend has recommended investing in real estate
A hedge fund holds its excess cash in 90-day commercial paper and negotiable certificates of deposit. The cash management policy of the hedge fund is best described as using:A. Capital market
An oil and gas exploration and production company announces that it is offering 30 million shares to the public at $45.50 each. This transaction is most likely a sale in the:A. Futures market.B.
Consider a mutual fund that invests primarily in fixed-income securities that have been determined to be appropriate given the fund’s investment goal. Which of the following is least likely to be a
A friend has asked you to explain the differences between open-end and closed-end funds. Which of the following will you most likely include in your explanation?A. Closed-end funds are unavailable to
The usefulness of a forward contract is limited by some problems. Which of the following is most likely one of those problems?A. Once you have entered into a forward contract, it is difficult to exit
Tony Harris is planning to start trading in commodities. He has heard about the use of futures contracts on commodities and is learning more about them. Which of the following is Harris least likely
A German company that exports machinery is expecting to receive $$10$ million in three months. The firm converts all its foreign currency receipts into euros. The chief financial officer of the
A book publisher requires substantial quantities of paper. The publisher and a paper producer have entered into an agreement for the publisher to buy and the producer to supply a given quantity of
The Standard & Poor’s Depositary Receipts (SPDRs) is an investment that tracks the S&P 500 stock market index. Purchases and sales of SPDRs during an average trading day are best described as:A.
Which of the following statements about exchange-traded funds is most correct?A. Exchange-traded funds are not backed by any assets.B. The investment companies that create exchange-traded funds are
Jason Schmidt works for a hedge fund and he specializes in finding profit opportunities that are the result of inefficiencies in the market for convertible bonds—bonds that can be converted into a
Pierre-Louis Robert just purchased a call option on shares of the Michelin Group. A few days ago he wrote a put option on Michelin shares. The call and put options have the same exercise price,
An online brokerage firm has set the minimum margin requirement at 55 percent. What is the maximum leverage ratio associated with a position financed by this minimum margin requirement?A. 1.55.B.
A trader has purchased 200 shares of a non-dividend-paying firm on margin at a price of $50 per share. The leverage ratio is 2.5. Six months later, the trader sells these shares at $60 per share.
Jason Williams purchased 500 shares of a company at $$32$ per share. The stock was bought on 75 percent margin. One month later, Williams had to pay interest on the amount borrowed at a rate of 2
Caroline Rogers believes the price of Gamma Corp. stock will go down in the near future. She has decided to sell short 200 shares of Gamma Corp. at the current market price of h47. The initial margin

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