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Sample Chapters
Chapter One
The Process of Portfolio Management
B 1. Classical security analysis is sometimes called
- ABC analysis
- EIC analysis
- GBY analysis
- CPI analysis
C 2. The modern trend in investments is to ______ security analysis and ______ portfolio management.
- emphasize, emphasize
- emphasize, de-emphasize
- de-emphasize, emphasize
- de-emphasize, de-emphasize
B 3. Portfolio management is primarily concerned with
- increasing return
- reducing risk
- predicting the future
- explaining the past
D 4. Most of the academic literature of the past two decades has supported the
- arbitrage pricing theory
- benefits of high PE stocks
- usefulness of stock charts
- efficient markets paradigm
A 5. “The lower the dispersion in returns, the greater the accumulated value of otherwise equal investments.” This statement is
- true
- false
- true for the short run, but not necessarily true for the long run
- true for the long run, but not necessarily true for the short run
D 6. ______ is cheap in the investment business.
- Risk
- Return
- Time
- Talk
A 7. Which of the following is a key concept in finance?
- A dollar today is worth more than a dollar tomorrow
- Regardless of anything else, the higher the stock price, the better
- Regardless of anything else, the lower the risk, the better
- Risk averse people will not take a risk
B 8. Understanding ______ is essential to bond portfolio management.
- convexity
- duration
- semi-variance
- bond betas
C 9. According to the book, the first step in portfolio management is
- setting portfolio objectives
- formulating an investment strategy
- learning the basic principles of finance
- having a game plan for portfolio revision
B 10. A portfolio should have both ______ and ______ objective.
- a short term, a long term
- a primary, a secondary
- an initial, a final
- an explicit, an implicit
A 11. One of the most consequential bits of academic research regarding portfolio construction is a paper by
- Evans and Archer
- Andrew and McLaughlin
- Lawrence and Philippatos
- Miles and Ezzell
B 12. ______ is a topic in this textbook that most others omit.
- Real estate
- Security screening
- Performance evaluation
- Principles of the futures market
C 13. Real assets discussed in this book include
- art
- rare coins
- timberland
- diamonds
D 14. Which of the following is a popular means of increasing income from a portfolio?
- Selling bonds
- Selling stock short
- Buying put options
- Option overwriting
A 15. Portfolio protection was called ______ until the stock market crash in 1987.
- portfolio insurance
- portfolio hedging
- dynamic hedging
- arbitrage
D 16. In this text, the chapter on contemporary issues includes all of the following except
- tactical asset allocation
- stock lending
- program trading
- put-call parity
C 17. A stock is a good investment if the company is
- well-run
- in a growing industry
- poorly run but the stock is underpriced
- extremely popular among investors
B 18. As an introduction, the two key concepts in finance are
- buy low and sell high
- the time value of money and adjustment for risk
- be patient, but strike when the time is right
- manage earnings and save judiciously
A 19. According to Chapter 1, should investors invest in stocks today?
- Yes, because it can be a costly decision to try to time the market
- Yes, because the economy looks good now
- No, because the market is too high now
- 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
- efficient portfolios
- undervalued securities
- the highest long-term growth rates
- 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?
- 4%
- 1%
- 6%
- 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?
- 4%
- 8%
- 6%
- 3%
B 4. The variance of a two-security portfolio decreases as the return correlation of the two securities
- increases
- decreases
- changes in either direction
- cannot be determined
D 5. A security has a return variance of 25%. The standard deviation of returns is
- 5%
- 15%
- 25%
- 50%
C 6. A security has a return variance of 16%. The standard deviation of returns is
- 4%
- 16%
- 40%
- 50%
A 7. Covariance is the product of two securities’
- expected deviations from their means
- standard deviations
- betas
- standard deviations divided by their correlation
C 8. The covariance of a random variable with itself is
- its correlation with itself
- its standard deviation
- its variance
- equal to 1.0
D 9. Covariance is _____ correlation is ______.
- positive, positive or negative
- negative, positive or negative
- positive or negative, positive or zero
- positive or negative, positive or negative
C 10. For a six-security portfolio, it is necessary to calculate ___ covariances plus ___ variances.
- 36, 6
- 30, 6
- 15, 6
- 30, 12
B 11. COV (A,B) = .335. What is COV (B,A)?
- – 0.335
- 335
- (0.335 x 0.335)
- Cannot be determined
A 12. One of the first proponents of the single index model was
- William Sharpe
- Robert Merton
- Eugene Fama
- Merton Miller
B 13. Without knowing beta, determining portfolio variance with a sixty-security portfolio requires ___ statistics per security.
- 1
- 60
- 3600/2
- 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?
- 15
- 40
- 55
- 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?
- 15
- 35
- 55
- 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?
- 33
- 36
- 41
- 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)?
- .255
- .288
- .314
- .355
B 18. As portfolio size increases, the variance of the error term generally
- increases
- decreases
- approaches 1.0
- becomes erratic
C 19. The least risk portfolio is called the
- optimum portfolio
- efficient portfolio
- minimum variance portfolio
- market portfolio
B 20. Industry effects are associated with
- the single index model
- the multi-index model
- the Markowitz model
- the covariance matrix
A 21. COV (A,B) is equal to
- the product of their standard deviations and their correlation
- the product of their variances and their correlation
- the product of their standard deviations and their covariances
- the product of their variances and their covariances
A 22. The covariance between a constant and a random variable is
- zero
- 0
- their correlation
- 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?
- 005
- 010
- 021
- 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?
- 00
- 25
- 50
- 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?
- 1,700
- 5,650
- 12,350
- 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?
- 1,700
- 5,650
- 12,350
- 1,444,150
A 27. Knowing beta, determining the portfolio with a sixty-security fully diversified portfolio requires ______ statistic(s) per security.
- 1
- 60
- 3600/2
- 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?
- 17%
- 19%
- 21%
- 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?
- 15.8%
- 18.4%
- 22.0%
- 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?
- 57
- 77
- 97
- 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?
- 0.015
- 0.025
- 0.035
- 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?
- 25%
- 50%
- 75%
- 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?
- 18%
- 19%
- 20%
- 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?
- 15%
- 20%
- 23%
- 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?
- 0.425
- 0.625
- 0.825
- 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?
- 11%
- 13%
- 15%
- 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?
- 5%
- 6%
- 7%
- 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?
- 01052
- 01875
- 03425
- 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?
- 34%
- 55%
- 73%
- 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?
- 12%
- 14%
- 16%
- 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?
- 2%
- 1%
- 3%
- 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?
- 0.688
- 0.738
- 0.878
- 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?
- 4%
- 9%
- 6%
- 1%
B 44. What is the standard deviation for a portfolio with 60% invested in X and 40% invested in Y?
- 4%
- 1%
- 2%
- 6%
C 45. What is the beta for a portfolio with 60% invested in X and 40% invested in Y?
- 12
- 22
- 32
- 42
D 46. What is the covariance between Stock X and Stock Y?
- 025
- 033
- 047
- 054
D 47. What is the percent invested in Stock X to yield the minimum variance portfolio with Stock X and Stock Y?
- 21
- 38
- 51
- 69
D 48. What is the expected return for a portfolio with 20% invested in X and 80% invested in Y?
- 9%
- 6%
- 5%
- 2%
B 49. What is the standard deviation for a portfolio with 20% invested in X and 80% invested in Y?
- 2%
- 8%
- 1%
- 6%
D 50. What is the beta for a portfolio with 20% invested in X and 80% invested in Y?
- 14
- 24
- 34
- 44