1

If your client is not knowledgeable about the market, you should ____ versus comparable portfolios.

		increase the frequency of trading
		increase the risk of the portfolio
		decrease your time with the client
		decrease the risk of the portfolio

Question 2

Which of the following is FALSE?

		the benchmark chosen must be investable
		the benchmark most be chosen in advance
		the benchmark must match the portfolio allocation
		the benchmark must be used over short time period

Question 3

It is appropriate for a financial planner to assess the ethic or cultural background of a client when creating the portfolio.

		True
		False

Question 4

Which is a harder condition to meet: prudent man or prudent expert?

		prudent man
		prudent expert
		they are the same

Question 5

An investor assumes her income will stay the approximately same over the next five years. If she carries higher personal debt levels in period one, she will have

		higher future consumption in period two
		steady future consumption in period two
		lower future consumption in period two

Question 6

Which of the following is NOT a common portfolio mistake?

		Investors tend to rebalance unevenly
		Investors tend to overestimate the cost of retirement
		Investors tend to compare the assets within a portfolio
		Investors wait to long to start investing

Question 7

A fiduciary must allow an investor to be undiversified if the investor chooses to be.

		True
		False
		Maybe – but only if it is well documented that the fiduciary told the investor the portfolio is not diversified and the investor accepted the additional risk

Question 8

Which of the following is NOT a common portfolio management mistake?

		underestimating the cost of retirement
		not saving enough when earning a good income
		starting to save too late
		viewing all assets as a basket and willing to shift risk between accounts

Question 9

A Value Line ranking of ____ is a good indicator of one-year performance.

		1
		5
		1 and 5
		1 or 5

Question 10

Which of the following is correct?

		Efficiency means that investors won’t earn profits for an extended period of time.
		Efficiency means that investors won’t earn normal profits for an extended period of time.
		Efficiency means that investors won’t earn abnormal profits for an extended period of time.
		Efficiency means all three things listed above.

Question 11

Milton Friedman _____ insider trading and Peter Bernstein ______.

		was against; promoted varying asset allocations during the business cycle
		was against; promoted a steady asset allocation during the business cycle
		was for; promoted varying asset allocations during the business cycle
		was for; promoted a steady asset allocation during the business cycle

Question 12

After a crisis, the market returns to normal trend usually

		within a few months
		within a year
		within a few years

Question 13

This type of efficiency says that market prices reflect all public information

		weak form
		semi-strong form
		strong form

Question 14

Investors tend to ____ to new, unexpected information.

		underreact
		overreact

Question 15

While still being legal, most companies will ____ earnings when the firm gives guidance about its earnings a few weeks before earnings are announced.

		Under-estimate
		Over-estimate
		Correctly estimate

Question 16

Weak form efficiency says

		past information is already reflected in the stock price
		past and present information is already reflected in the stock price
		all public and private information is already reflected in the stock price
		all private information is already reflected in the stock price

Question 17

If the beta for a portfolio increases holding all else constant, its required return will

		increase which is good
		increase which is bad
		decrease which is good
		decrease which is bad

Question 18

An investor puts $5,000 into a mutual fund on January 1st, another $5,000 on February 1st, and a third $5,000 on March 1st. On March 31st, the fund has $16,000. What is the holding period yield for the three months? (don’t worry about annualizing it)

		1.67%
		6.7%
		16%
		60%

Question 19

Stock D has a correlation of 0.7 and 0.2 with Stock E and F, respectively. Stock E has a correlation of 0.3 with Stock F. Which of the following portfolios will have the least amount of risk?

		equally invested in D and E
		equally invested in D and F
		equally invested in E and F
		totally invested in F

Question 20

The year-ending prices of ComTech for the last six years are $50.00, $57.00, $66.12, $74.05, $70.35 and $77.39. What is the arithmetic mean?

		9.4%
		9.13%
		11.5%
		10.9%

Question 21

The ________ mean finds a growth rate.

		arithmetic
		geometric

Question 22

Asset allocation means

		Diversifying among asset classes
		Diversifying within asset classes
		Diversifying between the optimal risky portfolio and the minimum variance portfolio
		Diversifying between the optimal risky portfolio and the risk-free rate

Question 23

What is the annualized holding period return of an investment that cost $60, earned $1.00 in dividends the first year, $1.40 in year two, $1.85 in year three, and $2.00 in year four and was sold for $55 at the end of the fourth year?

		20.5%
		4.8%
		0.5%
		2.1%

Question 24

Which of the following correlation coefficients represents the least amount of co-movement between two assets?

		0.85
		0.15
		-0.15
		-0.85

Question 25

Which is a better measure for predicting a typical year’s stock price performance?

		geometric mean
		standard deviation
		beta
		arithmetic mean

Question 26

The nominal risk free rate is a function of

		the real risk free rate and the investor’s variance
		the prime rate and the rate of inflation
		the T-bill rate plus the inflation rate
		the tax free rate plus the rate of inflation
		the real risk free rate plus the rate of inflation

Question 27

Which measure will rank in the same order as Alpha?

		Sharpe
		Treynor
		Both will rank with Alpha
		Neither will rank with Alpha

Question 28

As indicated by mutual fund flows, investors tend to

		beat the market
		seek safety
		invest in last year's winner
		invest in last year’s loser

Question 29

A mutual fund that was in the top quartile of funds in one year is more likely to be in the top quartile of fund in the next year.

		True
		False

Question 30

Fund A has an expected return of 9.5%, a standard deviation of 15.6% and a beta of 0.95.
Fund B has an expected return of 11.5%, a standard deviation of 17.8% and a beta of 1.10.
The S&P 500 index has an expected return of 10.5%, a standard deviation of 16.2% and a beta of 1.00.
The T-bill has an expected return of 4.5%
What would happen if Fund A’s beta increased to more than the beta of Fund B? Hold all else constant.

		A’s Treynor’s ratio would increase and it would be a buy
		A’s Treynor’s ratio would increase and it would not be a buy
		A’s Treynor’s ratio would decrease and it would be a buy
		A’s Treynor’s ratio would decrease and it would not be a buy

Question 31

Fund A has an expected return of 11.4%, a standard deviation of 18.2% and a beta of 1.05.
Fund B has an expected return of 12.1%, a standard deviation of 17.8% and a beta of 1.11.
Fund C has an expected return of 10.9%, a standard deviation of 16.8% and a beta of 0.90.
Fund D has an expected return of 10.75%, a standard deviation of 19.1% and a beta of 0.92.
The S&P 500 index has an expected return of 11.5%, a standard deviation of 16.2% and a beta of 1.00.
The T-bill has an expected return of 4.5%
Which of the following funds has a negative alpha?

		A, B, C, D
		A, B, D
		B, C
		C

Question 32

Fund A has an expected return of 11.4%, a standard deviation of 18.2% and a beta of 1.05.
Fund B has an expected return of 12.1%, a standard deviation of 17.8% and a beta of 1.11.
Fund C has an expected return of 10.9%, a standard deviation of 16.8% and a beta of 0.90.
Fund D has an expected return of 10.75%, a standard deviation of 19.1% and a beta of 0.92.
The S&P 500 index has an expected return of 11.5%, a standard deviation of 16.2% and a beta of 1.00.
The T-bill has an expected return of 4.5%
Which of the following funds has the best expected alpha?

		A
		B
		C
		D

Question 33

Fund A has an expected return of 9.5%, a standard deviation of 15.6% and a beta of 0.95.
Fund B has an expected return of 11.5%, a standard deviation of 17.8% and a beta of 1.10.
The S&P 500 index has an expected return of 10.5%, a standard deviation of 16.2% and a beta of 1.00.
The T-bill has an expected return of 4.5%
Which of the funds has an alpha that will plot above the Security Market Line?

		Fund A
		Fund B
		Both Fund A and Fund B
		Neither Fund A or Fund B

Question 34

Fund A has an expected return of 9.5%, a standard deviation of 15.6% and a beta of 0.95.
Fund B has an expected return of 11.5%, a standard deviation of 17.8% and a beta of 1.10.
The S&P 500 index has an expected return of 10.5%, a standard deviation of 16.2% and a beta of 1.00.
The T-bill has an expected return of 4.5%
Which of the funds has a Sharpe’s Ratio that is better than the market’s ratio?

		Fund A
		Fund B
		Both Fund A and Fund B
		Neither Fund A or Fund B

Question 35

Fund A has an expected return of 11.4%, a standard deviation of 18.2% and a beta of 1.05.
Fund B has an expected return of 12.1%, a standard deviation of 17.8% and a beta of 1.11.
Fund C has an expected return of 10.9%, a standard deviation of 16.8% and a beta of 0.90.
Fund D has an expected return of 10.75%, a standard deviation of 19.1% and a beta of 0.92.
The S&P 500 index has an expected return of 11.5%, a standard deviation of 16.2% and a beta of 1.00.
The T-bill has an expected return of 4.5%
Which of the following funds is least desirable regarding the coefficient of variation?

		Fund A
		Fund B
		Fund C
		Fund D

Question 36

The bid-ask spread increases if the price level _____ and volatility _____.

		increases; increases
		increases; decreases
		decreases; increases
		decreases; decreases