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investment analysis portfolio

Questions and Answers of Investment Analysis Portfolio

20.A. Define Monte Carlo simulation and explain its use in finance.B. Compared with analytical methods, what are the strengths and weaknesses of Monte Carlo simulation for use in valuing
19. A portfolio has an expected return of 7% with a standard deviation of 13%. For an investor with a minimum annual return target of 4%, the probability that the portfolio return will fail to meet
18. A portfolio has an expected mean return of 8 percent and standard deviation of 14 percent. The probability that its return falls between 8 and 11 percent is closest to:A. 8.3%B. 14.8%.C. 58.3%.
17. A client has a portfolio of common stocks and fixed-income instruments with a current value of £1,350,000. She intends to liquidate £50,000 from the portfolio at the end of the year to purchase
16. The total number of parameters that fully characterizes a multivariate normal distribution for the returns on two stocks is:A. 3.B. 4.C. 5.
15. Which of the following assets most likely requires the use of a multivariate distribution for modeling returns?A. A call option on a bond B. A portfolio of technology stocks C. A stock in a
14. Which of the following is characteristic of the normal distribution?A. Asymmetry B. Kurtosis of 3 C. Definitive limits or boundaries
13. In futures markets, profits or losses on contracts are settled at the end of each trading day. This procedure is called marking to market or daily resettlement. By preventing a trader’s losses
12. If the probability that a portfolio outperforms its benchmark in any quarter is 0.75, the probability that the portfolio outperforms its benchmark in three or fewer quarters over the course of a
11. Find the area under the normal curve up to z ¼ 0.36; that is, find P(Z 0.36).Interpret this value.
10. State the approximate probability that a normal random variable will fall within the following intervals:A. Mean plus or minus one standard deviation.B. Mean plus or minus two standard
9. You are forecasting sales for a company in the fourth quarter of its fiscal year. Your lowend estimate of sales is €14 million, and your high-end estimate is €15 million. You decide to treat
8. You are examining the record of an investment newsletter writer who claims a 70 percent success rate in making investment recommendations that are profitable over a one-year time horizon. You have
7. A portfolio manager annually outperforms her benchmark 60 percent of the time.Assuming independent annual trials, what is the probability that she will outperform her benchmark four or more times
6. Over the last 10 years, a company’s annual earnings increased year over year seven times and decreased year over year three times. You decide to model the number of earnings increases for the
5. In a discrete uniform distribution with 20 potential outcomes of integers 1 to 20, the probability that X is greater than or equal to 3 but less than 6, P(3 X < 6), is:A. 0.10.B. 0.15.C. 0.20.
4. For a binomial random variable with five trials, and a probability of success on each trial of 0.50, the distribution will be:A. skewed.B. uniform.C. symmetric.
3. The value of the cumulative distribution function F(x), where x is a particular outcome, for a discrete uniform distribution:A. sums to 1.B. lies between 0 and 1.C. decreases as x increases.
2. Define the term “binomial random variable.” Describe the types of problems for which the binomial distribution is used.
From an approved list of 25 funds, a portfolio manager wants to rank 4 mutual funds from most recommended to least recommended. Which formula is most appropriate to calculate the number of possible
A firm will select two of four vice presidents to be added to the investment committee.How many different groups of two are possible?A. 6 B. 12 C. 24
A manager will select 20 bonds out of his universe of 100 bonds to construct a portfolio.Which formula provides the number of possible portfolios?A. Permutation formula B. Multinomial formula C.
An analyst produces the following joint probability function for a foreign index (FI) and a domestic index (DI).The covariance of returns on the foreign index and the returns on the domestic index is
Which of the following statements is most accurate? If the covariance of returns between two assets is 0.0023, then:A. the assets’ risk is near zero.B. the asset returns are unrelated.C. the asset
The probability distribution for a company’s sales is:The standard deviation of sales is closest to:A. $9.81 million.B. $12.20 million.C. $32.40 million. Probability 0.05 0.70 0.25 Sales ($
Given a portfolio of five stocks, how many unique covariance terms, excluding variances, are required to calculate the portfolio return variance?A. 10 B. 20 C. 25
All else being equal, as the correlation between two assets approaches +1.0, the diversification benefits:A. decrease.B. stay the same.C. increase.
An analyst develops the following covariance matrix of returns:The correlation of returns between the hedge fund and the market index is closest to:A. 0.005.B. 0.073.C. 0.764. Hedge Fund Market Index
Which of the following correlation coefficients indicates the weakest linear relationship between two variables?A. –0.67 B. –0.24 C. 0.33
The covariance of returns is positive when the returns on two assets tend to:A. have the same expected values.B. be above their expected value at different times.C. be on the same side of their
US and Spanish bonds have return standard deviations of 0.64 and 0.56, respectively. If the correlation between the two bonds is 0.24, the covariance of returns is closest to:A. 0.086.B. 0.670.C.
Which of the following best describes how an analyst would estimate the expected value of a firm under the scenarios of bankruptcy and survivorship? The analyst would use:A. the addition rule.B.
Which of the following is a property of two dependent events?A. The two events must occur simultaneously.B. The probability of one event influences the probability of the other event.C. The
After estimating the probability that an investment manager will exceed his benchmark return in each of the next two quarters, an analyst wants to forecast the probability that the investment manager
The probability of an event given that another event has occurred is a:A. joint probability.B. marginal probability.C. conditional probability.
If the probability that Zolaf Company sales exceed last year’s sales is 0.167, the odds for exceeding sales are closest to:A. 1 to 5.B. 1 to 6.C. 5 to 1.
Which probability estimate most likely varies greatly between people?A. An a priori probability B. An empirical probability C. A subjective probability
In probability theory, exhaustive events are best described as events:A. with a probability of zero.B. that are mutually exclusive.C. that include all potential outcomes.
Suppose the prospects for recovering principal for a defaulted bond issue depend on which of two economic scenarios prevails. Scenario 1 has probability 0.75 and will result in recovery of $0.90 per
You are using the following three criteria to screen potential acquisition targets from a list of 500 companies:If the criteria are independent, how many companies will pass the screen? Criterion
Compared to the normal distribution, this sample’s distribution is best described as having tails of the distribution with:A. less probability than the normal distribution.B. the same probability
This distribution is best described as:A. negatively skewed.B. having no skewness.C. positively skewed. An analyst examined a cross-section of annual returns for 252 stocks and calculated the
The coefficient of variation is closest to:A. 0.02.B. 0.42.C. 2.41. An analyst examined a cross-section of annual returns for 252 stocks and calculated the following statistics: Arithmetic Average
The interquartile range is closest to:A. 13.76.B. 25.74.C. 34.51. The following information relates to Questions 44-45. 180 160 154.45 140 120 100 80 60 51.51 40 114.25 100.49 79.74
The median is closest to:A. 34.51.B. 100.49.C. 102.98. The following information relates to Questions 44-45. 180 160 154.45 140 120 100 80 60 51.51 40 114.25 100.49 79.74
Consider two variables, A and B. If variable A has a mean of −0.56, variable B has a mean of 0.23, and the covariance between the two variables is positive, the correlation between these two
Without calculating the correlation coefficient, the correlation of the portfolio returns and the real estate index returns is:A. negative.B. zero.C. positive.
Without calculating the correlation coefficient, the correlation of the portfolio returns and the bond index returns is:A. negative.B. zero.C. positive.
Which of the following is a potential problem with interpreting a correlation coefficient?A. Outliers B. Spurious correlation C. Both outliers and spurious correlation
A correlation of 0.34 between two variables, X and Y, is best described as:A. changes in X causing changes in Y.B. a positive association between X and Y.C. a curvilinear relationship between X and Y.
The target semideviation of the returns over the 10 years if the target is 2% is closest to:A. 1.42%.B. 1.50%.C. 2.01%. A fund had the following experience over the past 10 years: Year 1 Return 4.5%
The standard deviation of the 10 years of returns is closest to:A. 2.40%.B. 2.53%.C. 7.58%. A fund had the following experience over the past 10 years: Year 1 Return 4.5% 2 6.0% 3 1.5% 4 -2.0% 5 0.0%
The harmonic mean return over the 10 years is closest to:A. 2.94%.B. 2.97%.C. 3.00%. A fund had the following experience over the past 10 years: Year 1 Return 4.5% 2 6.0% 3 1.5% 4 -2.0% 5 0.0% 6 4.5%
The geometric mean return over the 10 years is closest to:A. 2.94%.B. 2.97%.C. 3.00%. A fund had the following experience over the past 10 years: Year 1 Return 4.5% 2 6.0% 3 1.5% 4 -2.0% 5 0.0% 6
The arithmetic mean return over the 10 years is closest to:A. 2.97%.B. 3.00%.C. 3.33%. A fund had the following experience over the past 10 years: Year 1 Return 4.5% 2 6.0% 3 1.5% 4 -2.0% 5 0.0% 6
When analyzing investment returns, which of the following statements is correct?A. The geometric mean will exceed the arithmetic mean for a series with non-zero variance.B. The geometric mean
An analyst calculated the excess kurtosis of a stock’s returns as −0.75. From this information, we conclude that the distribution of returns is:A. normally distributed.B. thin-tailed compared to
The average return for Portfolio A over the past twelve months is 3%, with a standard deviation of 4%. The average return for Portfolio B over this same period is also 3%, but with a standard
The mean monthly return and the standard deviation for three industry sectors are shown in the following exhibit.Based on the coefficient of variation, the riskiest sector is:A. utilities.B.
Annual returns and summary statistics for three funds are listed in the following exhibit:The fund with the highest absolute dispersion is:A. Fund PQR if the measure of dispersion is the range.B.
For Year 6–Year 10, the mean absolute deviation of the MSCI World Index total returns is closest to:A. 10.20%.B. 12.74%.C. 16.40%.
The fourth quintile return for the MSCI World Index is closest to:A. 20.65%.B. 26.03%.C. 27.37%.
A portfolio manager invests €5,000 annually in a security for four years at the prices shown in the following exhibit.The average price is best represented as the:A. harmonic mean of €76.48.B.
The following exhibit shows the annual returns for Fund Y.The geometric mean return for Fund Y is closest to:A. 14.9%.B. 15.6%.C. 19.5%. Year 1 Year 2 Fund Y (%) 19.5 -1.9 Year 3 19.7 Year 4 35.0
At the beginning of Year X, an investor allocated his retirement savings in the asset classes shown in the following exhibit and earned a return for Year X as also shown.The portfolio return for Year
The annual returns for three portfolios are shown in the following exhibit. Portfolios P and R were created in Year 1, Portfolio Q in Year 2.The median annual return from portfolio creation to Year 5
Which valuation tool is recommended to be used if the goal is to make comparisons of three or more variables over time?A. Heat map B. Bubble line chart C. Scatter plot matrix
A heat map is best suited for visualizing the:A. frequency of textual data.B. degree of correlation between different variables.C. shape, center, and spread of the distribution of numerical data.
A line chart with two variables—for example, revenues and earnings per share—is best suited for visualizing:A. the joint variation in the variables.B. underlying trends in the variables over
A tree-map is best suited to illustrate:A. underlying trends over time.B. joint variations in two variables.C. value differences of categorical groups.
Which visualization tool works best to represent unstructured, textual data?A. Tree-Map B. Scatter plot C. Word cloud
A bar chart that orders categories by frequency in descending order and includes a line displaying cumulative relative frequency is referred to as a:A. Pareto Chart.B. grouped bar chart.C. frequency
The following is a frequency polygon of monthly exchange rate changes in the US dollar/Japanese yen spot exchange rate for a four-year period. A positive change represents yen appreciation (the yen
Based on the previous histogram, the distribution is best described as being:A. unimodal.B. bimodal.C. trimodal.
The bin containing the median return is:A. 3% to 8%.B. 8% to 13%.C. 13% to 18%.
The relative frequency of AA rated energy bonds, based on the total count, is closest to:A. 10.5%.B. 31.5%.C. 39.5%. A fixed-income portfolio manager creates a contingency table of the number of
The marginal frequency of energy sector bonds is closest to:A. 27.B. 85.C. 215. A fixed-income portfolio manager creates a contingency table of the number of bonds held in her portfolio by sector and
An analyst is using the data in the following exhibit to prepare a statistical report. Portfolio's Deviations from Benchmark Return for a 12-Year Period (%) Year 1 2.48 Year 7 -9.19 Year 2 -2.59 Year
An investment fund has the return frequency distribution shown in the following exhibit.Which of the following statements is correct?A. The relative frequency of the bin “−1.0 to þ2.0” is
In a frequency distribution, the absolute frequency measure:A. represents the percentages of each unique value of the variable.B. represents the actual number of observations counted for each unique
A two-dimensional rectangular array would be most suitable for organizing a collection of raw:A. panel data.B. time-series data.C. cross-sectional data.
Each individual row of data in the table can be best characterized as:A. panel data.B. time-series data.C. cross-sectional data.
Each individual column of data in the table can be best characterized as:A. panel data.B. time-series data.C. cross-sectional data.
An analyst uses a software program to analyze unstructured data—specifically, management’s earnings call transcript for one of the companies in her research coverage.The program scans the words
The resulting set of estimated probabilities would most likely be characterized as:A. ordinal data.B. discrete data.C. continuous data.
A fixed-income analyst uses a proprietary model to estimate bankruptcy probabilities for a group of firms. The model generates probabilities that can take any value between 0 and
Which of the following data types would be classified as being categorical?A. Discrete B. Nominal C. Continuous
Data values that are categorical and not amenable to being organized in a logical order are most likely to be characterized as:A. ordinal data.B. discrete data.C. nominal data.
Published ratings on stocks ranging from 1 (strong sell) to 5 (strong buy) are examples of which measurement scale?A. Ordinal B. Continuous C. Nominal
Given a 5 percent discount rate, find the present value of a four-year ordinary annuity of£100 per year starting in Year 1 as the difference between the following two level perpetuities: Perpetuity
Consider a level perpetuity of £100 per year with its first payment beginning at t ¼ 5.What is its present value today (at t ¼ 0), given a 5 percent discount rate?
The British government once issued a type of security called a consol bond, which promised to pay a level cash flow indefinitely. If a consol bond paid £100 per year in perpetuity, what would it be
A German pension fund manager anticipates that benefits of €1 million per year must be paid to retirees. Retirements will not occur until 10 years from now at time t ¼ 10.Once benefits begin to be
Suppose your company’s defined contribution retirement plan allows you to invest up to €20,000 per year. You plan to invest €20,000 per year in a stock index fund for the next 30 years.
An insurance company has issued a Guaranteed Investment Contract (GIC) that promises to pay $100,000 in six years with an 8 percent return rate. What amount of money must the insurer invest today at
Suppose you own a liquid financial asset that will pay you $100,000 in 10 years from today. Your daughter plans to attend college four years from today, and you want to know what the asset’s
The manager of a Canadian pension fund knows that the fund must make a lump-sum payment of C$5 million 10 years from now. She wants to invest an amount today in a GIC so that it will grow to the
Suppose you are considering purchasing a financial asset that promises to pay €1,000 per year for five years, with the first payment one year from now. The required rate of return is 12 percent per
Continuing with the CD example, suppose your bank offers you a CD with a two-year maturity, a stated annual interest rate of 8 percent compounded quarterly, and a feature allowing reinvestment of the
You are the lucky winner of your state’s lottery of $5 million after taxes. You invest your winnings in a five-year certificate of deposit (CD) at a local financial institution.The CD promises to

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