Test Bank For Portfolio Construction Management And Protection 5th Ed by Robert A. Strong

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Sample Chapters

 

Chapter One

 

The Process of Portfolio Management

 

 

B        1.  Classical security analysis is sometimes called

1. ABC analysis
2. EIC analysis
3. GBY analysis
4. CPI analysis

 

C       2.  The modern trend in investments is to ______ security analysis and ______ portfolio management.

1. emphasize, emphasize
2. emphasize, de-emphasize
3. de-emphasize, emphasize
4. de-emphasize, de-emphasize

 

B        3.  Portfolio management is primarily concerned with

1. increasing return
2. reducing risk
3. predicting the future
4. explaining the past

 

D       4.  Most of the academic literature of the past two decades has supported the

1. arbitrage pricing theory
2. benefits of high PE stocks
3. usefulness of stock charts
4. efficient markets paradigm

 

A       5.  “The lower the dispersion in returns, the greater the accumulated value of otherwise equal investments.”  This statement is

1. true
2. false
3. true for the short run, but not necessarily true for the long run
4. true for the long run, but not necessarily true for the short run

 

D       6.  ______ is cheap in the investment business.

1. Risk
2. Return
3. Time
4. Talk

 

A       7.  Which of the following is a key concept in finance?

1. A dollar today is worth more than a dollar tomorrow
2. Regardless of anything else, the higher the stock price, the better
3. Regardless of anything else, the lower the risk, the better
4. Risk averse people will not take a risk

 

B        8.  Understanding ______ is essential to bond portfolio management.

1. convexity
2. duration
3. semi-variance
4. bond betas

 

C       9.  According to the book, the first step in portfolio management is

1. setting portfolio objectives
2. formulating an investment strategy
3. learning the basic principles of finance
4. having a game plan for portfolio revision

 

B        10.  A portfolio should have both ______ and ______ objective.

1. a short term, a long term
2. a primary, a secondary
3. an initial, a final
4. an explicit, an implicit

 

A       11.  One of the most consequential bits of academic research regarding portfolio construction is a paper by

1. Evans and Archer
2. Andrew and McLaughlin
3. Lawrence and Philippatos
4. Miles and Ezzell

 

B        12.  ______ is a topic in this textbook that most others omit.

1. Real estate
2. Security screening
3. Performance evaluation
4. Principles of the futures market

 

C       13.  Real assets discussed in this book include

1. art
2. rare coins
3. timberland
4. diamonds

 

D       14. Which of the following is a popular means of increasing income from a portfolio?

1. Selling bonds
2. Selling stock short
3. Buying put options
4. Option overwriting

 

A       15.  Portfolio protection was called ______ until the stock market crash in 1987.

1. portfolio insurance
2. portfolio hedging
3. dynamic hedging
4. arbitrage

 

D       16.  In this text, the chapter on contemporary issues includes all of the following except

1. tactical asset allocation
2. stock lending
3. program trading
4. put-call parity

 

C       17.  A stock is a good investment if the company is

1. well-run
2. in a growing industry
3. poorly run but the stock is underpriced
4. extremely popular among investors

 

B        18.  As an introduction, the two key concepts in finance are

1. buy low and sell high
2. the time value of money and adjustment for risk
3. be patient, but strike when the time is right
4. manage earnings and save judiciously

 

A       19.  According to Chapter 1, should investors invest in stocks today?

1. Yes, because it can be a costly decision to try to time the market
2. Yes, because the economy looks good now
3. No, because the market is too high now
4. No, because the market is too volatile now

Chapter Five

 

The Mathematics of Diversification

 

 

A       1.  The work of Harry Markowitz is based on the search for

1. efficient portfolios
2. undervalued securities
3. the highest long-term growth rates
4. minimum risk portfolios

 

B        2.  Securities A and B have expected returns of 12% and 15%, respectively.  If you put 30% of your money in Security A and the remainder in B, what is the portfolio expected return?

13. 4%
14. 1%
15. 6%
16. 3%

 

B        3.  Securities A and B have expected returns of 12% and 15%, respectively.  If you put 40% of your money in Security A and the remainder in B, what is the portfolio expected return?

13. 4%
14. 8%
15. 6%
16. 3%

 

B        4.  The variance of a two-security portfolio decreases as the return correlation of the two securities

1. increases
2. decreases
3. changes in either direction
4. cannot be determined

 

D       5.  A security has a return variance of 25%.  The standard deviation of returns is

1. 5%
2. 15%
3. 25%
4. 50%

 

 

 

 

C       6.  A security has a return variance of 16%.  The standard deviation of returns is

1. 4%
2. 16%
3. 40%
4. 50%

 

A       7.  Covariance is the product of two securities’

1. expected deviations from their means
2. standard deviations
3. betas
4. standard deviations divided by their correlation

 

C       8.  The covariance of a random variable with itself is

1. its correlation with itself
2. its standard deviation
3. its variance
4. equal to 1.0

 

D       9.  Covariance is _____ correlation is ______.

1. positive, positive or negative
2. negative, positive or negative
3. positive or negative, positive or zero
4. positive or negative, positive or negative

 

C       10.  For a six-security portfolio, it is necessary to calculate ___ covariances plus ___ variances.

1. 36, 6
2. 30, 6
3. 15, 6
4. 30, 12

 

B        11.  COV (A,B) = .335.  What is COV (B,A)?

1. – 0.335
2. 335
3. (0.335 x 0.335)
4. Cannot be determined

 

A       12.  One of the first proponents of the single index model was

1. William Sharpe
2. Robert Merton
3. Eugene Fama
4. Merton Miller

 

B        13.  Without knowing beta, determining portfolio variance with a sixty-security portfolio requires ___ statistics per security.

1. 1
2. 60
3. 3600/2
4. 3600

 

B        14.  Securities A, B, and C have betas of 1.2, 1.3, and 1.7, respectively.  What is the beta of an equally weighted portfolio of all three?

1. 15
2. 40
3. 55
4. 60

 

B        15.  Securities A, B, and C have betas of 1.2, 1.3, and 1.7, respectively.  What is the beta of a portfolio composed of 1/2 A and 1/4 each of B and C?

1. 15
2. 35
3. 55
4. 60

 

B        16.  A diversified portfolio has a beta of 1.2; the market variance is 0.25.  What is the diversified portfolio’s variance?

1. 33
2. 36
3. 41
4. 44

 

B        17.  Security A has a beta of 1.2; security B has a beta of 0.8.  If the market variance is 0.30, what is COV (A,B)?

1. .255
2. .288
3. .314
4. .355

 

B        18.  As portfolio size increases, the variance of the error term generally

1. increases
2. decreases
3. approaches 1.0
4. becomes erratic

 

 

 

C       19.  The least risk portfolio is called the

1. optimum portfolio
2. efficient portfolio
3. minimum variance portfolio
4. market portfolio

 

B        20.  Industry effects are associated with

1. the single index model
2. the multi-index model
3. the Markowitz model
4. the covariance matrix

 

A       21.  COV (A,B) is equal to

1. the product of their standard deviations and their correlation
2. the product of their variances and their correlation
3. the product of their standard deviations and their covariances
4. the product of their variances and their covariances

 

A       22.  The covariance between a constant and a random variable is

1. zero
2. 0
3. their correlation
4. the product of their betas

 

D       23.  The covariance between a security’s returns and those of the market index is 0.03.  If the security beta is 1.15, what is the market variance?

1. 005
2. 010
3. 021
4. 026

 

D       24.  COV(A,B) = 0.50; the variance of the market is 0.25, and the beta of Security A is 1.00.  What is the beta of security B?

1. 00
2. 25
3. 50
4. 00

 

 

 

 

 

D       25.  There are 1,700 stocks in the Value Line index.  How many covariances would have to be calculated in order to use the Markowitz full covariance model?

1. 1,700
2. 5,650
3. 12,350
4. 1,444,150

 

A       26.  There are 1,700 stocks in the Value Line index.  How many betas would have to be calculated in order to find the portfolio variance?

1. 1,700
2. 5,650
3. 12,350
4. 1,444,150

 

A       27.  Knowing beta, determining the portfolio with a sixty-security fully diversified portfolio requires ______ statistic(s) per security.

1. 1
2. 60
3. 3600/2
4. 3600

 

A       28.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the expected return for a portfolio with 80% invested in Stock A and 20% invested in Stock B?

1. 17%
2. 19%
3. 21%
4. 23%

 

B        29.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the standard deviation for a portfolio with 80% invested in Stock A and 20% invested in Stock B?

15. 15.8%
16. 18.4%
17. 22.0%
18. 28.0%

 

 

A       30.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the beta for a portfolio with 80% invested in Stock A and 20% invested in Stock B?

1. 57
2. 77
3. 97
4. 17

 

A       31.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the covariance between Stock A and Stock B?

1. 0.015
2. 0.025
3. 0.035
4. 0.045

 

C       32.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the percent invested in Stock A to yield the minimum standard deviation portfolio containing Stock A and Stock B?

1. 25%
2. 50%
3. 75%
4. 90%

 

C       33.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the expected return for a portfolio with 50% invested in Stock A and 50% invested in Stock B?

1. 18%
2. 19%
3. 20%
4. 21%

 

 

 

 

B        34.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the standard deviation for a portfolio with 50% invested in Stock A and 50% invested in Stock B?

1. 15%
2. 20%
3. 23%
4. 25%

 

C       35.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the beta for a portfolio with 50% invested in Stock A and 50% invested in Stock B?

1. 0.425
2. 0.625
3. 0.825
4. 1.125

 

B        36.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the expected return for a portfolio with 70% invested in Stock M and 30% invested in Stock N?

1. 11%
2. 13%
3. 15%
4. 17%

 

C       37.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the standard deviation for a portfolio with 70% invested in Stock M and 30% invested in Stock N?

12. 5%
13. 6%
14. 7%
15. 0%

 

 

 

B        38.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the covariance between Stock M and Stock N?

1. 01052
2. 01875
3. 03425
4. 04775

 

D       39.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the percent invested in Stock M to yield the minimum standard deviation portfolio containing Stock M and Stock N?

1. 34%
2. 55%
3. 73%
4. 92%

 

A       40.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the expected return for a portfolio with 80% invested in Stock M and 20% invested in Stock N?

1. 12%
2. 14%
3. 16%
4. 18%

 

B        41.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the standard deviation for a portfolio with 80% invested in Stock M and 20% invested in Stock N?

13. 2%
14. 1%
15. 3%
16. 5%

 

 

 

 

A       42.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the beta for a portfolio with 80% invested in Stock M and 20% invested in Stock N?

1. 0.688
2. 0.738
3. 0.878
4. 0.968

 

The next 8 questions relate to the following table of information:

 

Stock X                  Stock Y

 

Expected Return                14%               18%

Standard Deviation            40%               54%

Beta                                  1.20               1.50

Correlation (X,Y)  =  0.25

 

C       43.  What is the expected return for a portfolio with 60% invested in X and 40% invested in Y?

14. 4%
15. 9%
16. 6%
17. 1%

 

B        44.  What is the standard deviation for a portfolio with 60% invested in X and 40% invested in Y?

32. 4%
33. 1%
34. 2%
35. 6%

 

C       45.  What is the beta for a portfolio with 60% invested in X and 40% invested in Y?

1. 12
2. 22
3. 32
4. 42

 

 

 

 

D       46.  What is the covariance between Stock X and Stock Y?

1. 025
2. 033
3. 047
4. 054

 

D       47.  What is the percent invested in Stock X to yield the minimum variance portfolio with Stock X and Stock Y?

1. 21
2. 38
3. 51
4. 69

 

D       48.  What is the expected return for a portfolio with 20% invested in X and 80% invested in Y?

14. 9%
15. 6%
16. 5%
17. 2%

 

B        49.  What is the standard deviation for a portfolio with 20% invested in X and 80% invested in Y?

41. 2%
42. 8%
43. 1%
44. 6%

 

D       50.  What is the beta for a portfolio with 20% invested in X and 80% invested in Y?

1. 14
2. 24
3. 34
4. 44