Quiz ch 15 and 16

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Jan 9, 2024

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Quiz ch 15 & 16 Ch 15 1. A 7% annual pay bond, issued at par, was purchased for 102. One year later, it was called at a price of 101. What is the rate of return enjoyed by the investor? a) 4.9% b) 5.9% c) 6.0% d) 7.0% 2. Which of the following is true with respect to the relationship between inflation, real rates of return, and nominal rates of return? a) The higher the inflation rate, the higher the real rate of return required by an investor. b) The higher the inflation rate, the higher the nominal rate of return required by an investor. c) The higher the inflation rate, the higher the real rate and nominal rate of return required by an investor. d) Inflation does not impact either real or nominal rates of return required by an investor. 3. The risk-free rate of return is represented by… a) T-bills. b) short-term government bonds. c) long-term government bonds. d) There is no such thing as a risk-free rate of return. 4. Which of the following securities has business risk associated with it? a) common shares b) common shares and secured corporate debt c) common shares and unsecured corporate debt d) common shares, secured corporate debt and unsecured corporate debt

5. Which of the following is not one of the common statistically-based measures of risk for an individual security? a) beta b) variance c) correlation d) standard deviation 6. An investor has a $250,000 portfolio. 70% is in Security One which returns 10% over the year. The remaining 30% is in Security Two which returns 5%. The value of the portfolio in one year’s time is… a) $268,750 b) $271,250 c) $272,500 d) Insufficient information 7. Which of the following is the preferred correlation when adding a single security to an already well- diversified portfolio? a) –1.0 b) 0.0 c) 0.5 d) 1.0 8. An investor is looking to add a security to an existing portfolio. The expected return of the current portfolio is 8% and its standard deviation is 15. The expected return of the security is 8.5% and its standard deviation is 15. There is a correlation of 0.0 between this security and the existing portfolio. Which of the following best describes the impact of adding the security to the portfolio? a) Adding the security will increase the expected return and reduce the risk. b) Adding the security will increase the expected return and not impact the risk. c) Adding the security will increase the expected return and increase the risk. d) Adding the security will increase the expected return and it is unclear how the risk will be impacted.

9. You are examining two companies. Company One has a beta of 1.2 and Company Two has a beta of .8. It is most likely that… a) Company One tends to be more profitable than Company Two. b) Company Two tends to be more profitable than Company One. c) Company One is a defensive stock and Company Two is a cyclical stock. d) Company Two is a defensive stock and Company One is a cyclical stock. 10. In the correct order, the first three steps of the portfolio management process are: a) determining investment objectives and constraints; designing an investment policy statement; and implementing the asset allocation b) designing the investment policy statement; implementing the asset allocation; and monitoring the economy, the markets, the portfolio and the client c) determining investment objectives and constraints; designing an investment policy statement; and formulating an asset allocation strategy and selecting investment styles d) determining investment objectives and constraints; formulating an asset allocation strategy and selecting investment styles; and designing an investment policy statement 11. The client’s risk tolerance should be matched to… a) the risk of each security in the portfolio. b) the risk of the average security in the portfolio. c) the risk of the riskiest security in the portfolio. d) the risk of the overall portfolio. 12. Sylvia Wong is a 35 year old single professional. For financial planning purposes, her time horizon should be understood as the present… a) until she needs the money. b) until the next major expected change in her life. c) until her retirement. d) until her death.

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Ch 16 13. Which of the following is not considered to be a fixed income product for asset mix purposes? a) mortgages b) strip bonds c) preferred shares d) convertible bonds 14. Which of the following is considered to be an equity product for asset mix purposes? a) rights b) index options c) exchange-traded funds d) All of the above 15. The expansion phase of the equity cycle tends to correspond to which phase of the business cycle? a) trough b) recovery c) expansion d) peak 16. During the peak phase of the equity cycle, the recommended fixed-income strategy is to hold... a) short-term bonds. b) medium-term bonds. c) long-term bonds. d) A laddered bond portfolio. 17. The recommended strategy in the stock market trough of the equity cycle is to… a) sell stocks and buy long-term bonds. b) sell stocks and sell long-term bonds. c) sell long-term bonds and buy cyclical stocks. d) sell long-term bonds and buy short-term bonds.

18. What are the two factors that, in combination, generally account for 80% to 90% of the change in stock market prices? a) Interest rate trends and economic trends. b) Interest rate trends and flow of funds trends. c) Economics trends and government policy trends. d) Government policy trends and flow of funds trends. 19. Which of the following equity manager styles tends to expose the investor to the greatest amount of risk during times of recession? a) value b) growth c) top-down d) bottom-up 20. For the sector rotator equity manager... a) stock selection is more important than industry selection and small cap stocks are generally purchased. b) industry selection is more important than stock selection and small cap stocks are generally purchased. c) stock selection is more important than industry selection and large cap stocks are generally purchased. d) industry selection is more important than stock selection and large cap stocks are generally purchased. 21. A middle-aged investor with a long time horizon and high tolerance for risk comes to you for investment advice. The most appropriate asset allocation for this individual would be: a) 50% cash, 30% bonds, 20% equities b) 30% cash, 40% bonds, 30% equities c) 10% cash, 30% bonds, 60% equities d) 0% cash, 20% bonds, 80% equities

22. A risk-averse 65 year old with a high need for income in her portfolio comes to you for investment advice. The most appropriate portfolio for this individual would be… a) 10% cash, 65% bonds, 25% equities b) 40% cash, 40% bonds, 20% equities c) 50% cash, 50% bonds, 0% equities d) 60% cash, 40% bonds 0% equities 23. An investor’s $400,000 portfolio has a long-term strategic asset allocation of 50% equities, 30% bonds and 20% cash. Over a year, equities fall by 10% while bonds increase 10%. Cash is unchanged. In order to rebalance the portfolio to the strategic allocation, the portfolio manager should… a) buy $16,000 worth of equities, sell $14,400 worth of bonds, and buy $1,600 worth of cash. b) buy $16,000 worth of equities, sell $14,400 worth of bonds, and sell $1,600 worth of cash. c) buy $14,400 worth of equities, sell $16,000 worth of bonds, and buy $1,600 worth of cash. d) buy $20,000 worth of equities, sell $18,000 worth of bonds, and sell $2,000 worth of cash 24. When an analyst is comparing the Sharpe ratios of different portfolios, she should look for the… a) lowest positive number possible. b) lowest negative number possible. c) highest positive number possible. d) highest negative number possible. 25. A negative Sharpe ratio means that… a) the portfolio lost money. b) the portfolio’s return was less than the risk-free rate. c) the portfolio’s return was less than that of the benchmark. d) the portfolio’s return was less that that of the benchmark minus the risk-free rate.

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1.B 15 – 6/7. [(101 – 102) + 7] / 102 = 5.9%. 2.B 15 – 9. 3.A 15 – 10. 4.D 15 – 10. 5.C 15 – 11/12. 6.B 15 – 12/13. $250,000 x .70 x 1.1 + $250,000 x .30 x 1.05 = $271,250. 7.A 15 – 14/15. 8.A 15 – 13/15. 9.D 15 – 16. 10.C 15 – 15/17. 11.D 15 – 18/19. 12.B 15 – 22. 13.D 16 – 5. 14.D 16 – 6. 15.C 16 – 10. 16.A 16 – 10. 17.C 16 – 10. 18.A 16 – 11. 19.B 16 – 12/13. 20.D 16 – 14/15. 21.C 16 – 18/19. 22.A 16 – 18/19. 23.B 16 – 19/20.

The portfolio is worth $400,000 and $200,000 is equities, $120,000 is bonds and $80,000 is cash. At the end of the year, the equities are worth $180,000, the bonds are worth $132,000, and the cash is worth $80,000. The portfolio is worth $392,000. The new allocation should be $196,000 equities, $117,600 in bonds, and $78,400 in cash. Therefore, $16,000 in equities should be purchased and $14,400 in bonds and $1,600 in cash sold. 24.C 16 – 25. 25.B 16 – 26