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investment analysis portfolio
Questions and Answers of
Investment Analysis Portfolio
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
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
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