Strategy seeks to increase the portfolio value by reinvesting current income in addition to capital gains?
Total return
In a two stock portfolio, if the correlation coefficient between two stocks were to decrease over time, everything else remaining constant, the portfolio's risk would
Decrease
Which statement about the correlation coefficient is false?
A value of zero means that the returns are independent.
Not a flow ratio?
Debt/equity
Which ratio is considered an internal liquidity ratio?
Receivables turnover
Not classified as contrary trading rules?
Confidence index
According to contrary opinion technicians, the ratio of mutual funds cash to total assets
____ near troughs in the market cycle and ____ near peaks.
Increases, decreases
An investment manager's style cannot be used as a basis for measuring the manager's performance relative to a benchmark.
False
In ____ asset allocation, the investor's risk tolerance and constraints are assumed to be
constant over time. However, changes in capital market conditions result in changes in
the portfolio's stock-bond mix.
Tactical
Least important consideration for a bond investor selecting a buy-and-hold strategy?
Liquidity
Junk bonds are high yield bond bonds rated below
BBB
Assuming no change in interest rates, the duration of a coupon bond
Declines more slowly than the term to maturity
Barbell Strategy
One half of funds are invested in short duration bonds and the test in long duration
bonds.
Ladder Strategy
An equal amount of funds are invested in a wide range of maturities.
An example of an active strategy for bond management would be
Credit analysis
A portfolio manager that attempts to select bonds based on their intrinsic value would be
carrying out
Valuation analysis
Futures differ from forward contracts because
None of the above
Treynor showed that rational, risk averse investors always prefer portfolio possibility
lines that have
Highly positive slopes
Treynor Measure
The measure of performance which divides the portfolio's risk premium by the portfolio's
beta.
In the absence of arbitrage opportunities, the forward contract price should be equal to
the current price plus
Cost of carry
Cost of carry considerations
- Commissions for physical storage
- An opportunity cost for the net amount of invested capital
- A premium for the convenience of consuming the asset now
If you were to purchase an October option with an exercise price of 50 for $8 and
simultaneously sell an October option with an exercise price of 60 for $2, you would be
Bullish and conservative
A vertical spread involves buying and selling call options in the same stock with
The same time period but different price.
Not a factor needed to calculate the value of an American call option?
In a two stock portfolio, if the correlation coefficient between two stocks were to decrease over time, everything else remaining constant, the portfolio's risk would
Decrease
Markowitz believes that any asset or portfolio of assets can be described by ____ parameter(s).
Two
The Markowitz model is based on several assumptions...
Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period.
Investors maximize one-period expected utility.
Investors estimate the risk of the portfolio on the basis of the variability of expected returns.
Investors base decisions solely on expected return and risk.
The purpose of calculating the covariance between two stocks is to provide a(n) ____ measure of their movement together.
Absolute
When individuals evaluate their portfolios they should evaluate
All assets and liabilities
NOT a statement about correlation coefficient?
A value of 0 means that the returns are independent.
You are given a two asset portfolio with a fixed correlation coefficient. If the weights of the two assets are varied the expected portfolio return would be ____ and the expected portfolio standard deviation would be ____.
Linear; elliptical
Operating performance is divided into which two subcategories of ratios?
Efficiency and profitability
Capital Market Theory Assumptions
All investors are Markowitz efficient investors.
All investors have homogeneous expectations.
There are no taxes or transaction costs in buying or selling assets.
All investors have the same one period time horizon.
(NOT All investments are indivisible so it is impossible to buy or sell fractional shares.)
The standard deviation of return for the risk-free asset is equal to zero.
True
Wrf = -0.50
The investor can borrow money at the risk-free rate.
Internal Liquidity Ratio
Receivables Turnover
The rate of return on a risk free asset should equal the...
Long run real growth rate of the economy
NOT component of ROE
Equity / sales
The separation theorem divides decisions on ____ from decisions on ____.
Investing; financing
NOT major class of ratio?
Market performance
Market portfolio consist of all...
Risky assets
NOT comparison with which ratios should be made
The firm's suppliers and customers
NOT a flow ratio?
Debt / equity
As the business cycle reaches a peak, inflation rates decrease.
False
Does NOT include the long-leading index?
Dow Jones Industrial average
Might cause industry's sales to decrease?
Changes in consumer tastes
Product obsolescence
Growth of substitute products
Sluggish economic growth
Industries with high levels of operating and financial leverage should benefit from lower inflation rates.
False
If a diffusion index for new orders went from 87 to 74 and then to 68, it would indicate ____ receipt of new orders and indicate a ____ in breadth and the possibility of a future ____ in the series.
Widespread; weakening; decline
NOT in the Index of leading indicators?
Changes in the sensitive materials price.
Strong, consistent industry components
Gold
Steel
Railroads
Tobacco
NOT cyclic indicators?
Diffusion indicators
In analyzing risk levels among industries, studies have found that
Risk levels vary among different industries.
Risk levels for the same industry remain fairly constant over time.
NOT significant in explaining stock returns?
Consumption
The U.S. balance of payments, the federal deficit and military contract awards are ____ of aggregate economic activity.
Not categorised indicators
NOT considered a structural influence on the economy and industry?
International economics
Contrary Trading Rules
Odd lot short sales
Investment advisory opinions
Relative OTC volume
CBOE put/call ratio
A speculative stock possesses a ____ probability of ____ return and is currently ____.
High; negative; overpriced
Growth Company
Acquire capital at an average cost and is able to invest in projects that yield an above average return.
In a(n) ____ strategy, a firm seeks to identify itself as unique within its industry.
Differentiation
NOT assumption of technical analysis
Stock prices follow a random walk
Porter contends that ____ and ____ are two important competitive strategies.
Low cost leadership; differentiation
Technical analysts feel that financial accounting statements lack information, or report it in a way that makes comparisons difficult. Which of the following does not constitute a problem?
Statements of change in financial position
Technical analysis differs from fundamental analysis in that
Technical analysts believe the market value of common stocks is determined by the interaction of supply and demand.
According to contrary opinion technicians, the ratio of mutual funds cash to total assets ____ near troughs in the market cycle and ____ near peaks.
Increases; decreases
For technical trading rules to generate returns that are superior to a buy-and-hold strategy, net of transaction costs, the market would have to be
Inefficient
Growth stocks generally have smaller capitalizations than value stocks.
False
In ____ asset allocation, the investor's risk tolerance and constraints are assumed to be constant over time. However, changes in capital market conditions result in changes in the portfolio's stock-bond mix.
Tactical
The goal of active equity portfolio management is to earn a portfolio return that exceeds the return of a passive benchmark portfolio (net of transaction costs) on a risk-adjusted basis.
True
An investment manager's style cannot be used as a basis for measuring the manager's performance relative to a benchmark.
False
Strategies for timing the market and adding value to actively managed portfolios?
Time the markets by shifting between different types of securities based on market forecasts and estimated risk premiums.
Shift funds between the various equity sectors, industries, investment styles, etc., in order to take advantage of the hot concept before the remainder of the market does.
Individual stockpicking in order to buy low and sell high.
n ____ strategy, certain economic sectors or industries are overweighted relative to the benchmark in anticipation of the next phase of the business cycle.
Sector rotation
NOT considered a mainstream investment style?
Benchmark
NOT a technique for constructing a passive index portfolio?
Linear programming
Asset allocation strategies?
Integrated asset allocation
Strategic asset allocation
Tactical asset allocation
Insured asset allocation
Coupon reinvestment risk arises because the yield to maturity computation implicitly assumes that all coupon flows will be reinvested at the
Promised yield to maturity
Contingent immunisation strategies
Provide the bond portfolio manager to engage in various active portfolio strategies if the client is willing to accept a floor value.
Matched funding technique
Classical immunisation
NOT normally be a reason for a bond swap?
Realigning the portfolio's duration
The term dedication, used to describe portfolio management techniques, is referring to servicing a prescribed set of
Liabilities
If an investor swaps identical issues to establish a loss, the loss is disallowed and the transaction is known as a
Wash sale
Junk bonds are high yield bond bonds rated below
BBB
For a bond investor selecting a buy-and-hold strategy, which of the following would be the least important consideration?
Liquidity
Futures have more default risk than forward contracts.
False
The value of a call option just prior to expiration is (where V is the underlying asset's market price and X is the option's exercise price)
Max [0, V ? X]
Considered in the valuation of call and put options?
Current stock price
Exercise price
Market interest rate
Volatility of underlying stock
In many cases, the investment in derivatives (both commissions and required investment) is more than in the cash market.
False
The price at which a futures contract is set at the end of the day is the
Settlement price
Futures differ from forward contracts because
None of the above
A true definition of an in-the-money option?
A call option in which the stock price exceeds the exercise price.
Derivative instruments exist because
They help shift risk from risk-averse investors to risk-takers.
They help in forming prices.
They have lower investment costs.
The CBOE brought numerous innovations to the option market, which of the following is not such an innovation?
Creation of a non-liquid secondary option market
The buyer of a futures contract is said to be long futures.
The seller of a futures contract is said to be short futures.
True
A calendar spread requires the purchase and sale of two calls or two puts in the same stock with
The same exercise price but different expiration dates.
A money spread involves buying and selling call options in the same stock with
The same time period but different exercise price.
A vertical spread involves buying and selling call options in the same stock with
The same time period but different price.
Buying a bear spread is equivalent to
Selling a bull spread
If you were to purchase an October option with an exercise price of 50 for $8 and simultaneously sell an October option with an exercise price of 60 for $2, you would be
Bullish and conservative
In a money spread, an investor would
Buy two out-of-the-money call options on the same stock with different exercise dates.
The creation of the CBOE led to all the following innovations in options except
Creation of a primary market
NOT a factor needed to calculate the value of an American call option?
The exchange on which the stock is listed
You own a stock that has risen from $10 per share to $32 per share. You wish to delay taking the profit but you are troubled about the short run behavior of the stock market. An effective action on your part would be to
Purchase a put
The main tradeoff between forward and future contracts is
Design flexibility
Credit risk
Liquidity risk
The process by which invest on margin accounts are credited or debited to reflect daily trading gains or losses is referred to as the ____ process.
Marked-to-market
As a contract approaches maturity, the spot price and forward price
Converge
NOT a function of the optimal hedge ratio
The standard deviation of changes in spot prices.
The variance deviation of changes in forward prices.
The major difference between valuing futures versus forward contracts stems from the fact that future contracts are
Marked-to-market daily
NOT considered a "cost of carry"?
Risk premium for uncertainty
Investors seek protection against the increasing volatility of interest rates.
True
The most popular financial futures in terms of average daily volume
T-Bond contracts
The major requirements of a portfolio manager include the following, except
Completely diversify the portfolio to eliminate all systematic risk.
Portfolio managers who anticipate an increase in interest rates should
Decrease the portfolio duration.
Treynor showed that rational, risk averse investors always prefer portfolio possibility lines that have
Highly positive slopes
The measure of performance which divides the portfolio's risk premium by the portfolio's beta is the
Treynor measure
Sharpe's performance measure divides the portfolio's risk premium by the
SD of the rate of return
Which measure of portfolio performance allows analysts to determine the statistical significance of abnormal returns?
Jensen measure
Selectivity measures how well a portfolio performed relative to a
Naively selected portfolio of equal risk.
A portfolio performance measurement technique that decomposes the return of a manager's holdings to a predetermined benchmark's returns and separates the difference into an allocation and selection is called
Performance attribution analysis
Under the performance attribution analysis method, the ____ measures the manager's decision to over- or underweight a particular market segment in terms of that segment's return performance relative to the overall return to the benchmark.
Allocation effect
Under the performance attribution analysis method, the ____ measures the manager's ability to form specific market segment portfolios that generate superior returns relative to the way in which the comparable market segment is defined in the benchmark portfolio weighted by the manager's actual market segment investment proportions.
