Deck 13: Managing Your Own Portfolio

Question 1

The formula plan that requires maintaining a target dollar investment in the speculative portion of an investor's portfolio is the

A) most passive of all the formula plans.
B) constant-dollar plan.
C) target return plan.
D) constant-ratio plan.

Answer 1

B

Question 2

Fred and Martha are in their seventies and retired. Which one of the following sets of portfolio statistics might best suit their situation if their primary investment goal is current income with limited risk?

A) Beta of 1.1 and a dividend yield of 5.4%.
B) Beta of 1.6 and a dividend yield of 6.4%.
C) Beta of 0.86, and a dividend yield of 4.6%.
D) Beta of 0.83 and a dividend yield of 6.3%.

Answer 2

D

Question 3

Tim purchased a share ten months ago for $14 a share, received a $1 dividend per share last month, and sold the share today for $16 per share. Tim has a marginal tax rate of 30%. Both capital gains for securities held more than one year and dividend income is taxed at 15%. What is Tim's after- tax holding period return? Hint: The tax rate for capital gains with the holding period less than one year is the same as the marginal tax rate.

A) 16.1%.
B) 14.1%.
C) 18.2%.
D) 15.9%.

Answer 3

A

Question 4

The constant- ratio plan

A) requires the establishment of trigger points for portfolio rebalancing.
B) utilises a predetermined ratio between desired current yield and expected capital gains.
C) is an attempt to time the cyclical movements of the market.
D) strictly adheres to a buy- and- hold strategy.

Question 5

Treynor's measure of portfolio performance focuses on

A) diversifiable risk.
B) total risk.
C) the standard deviation of the portfolio.
D) non-diversifiable risk.

Question 6

Allison's portfolio has an expected return of 14% and a standard deviation of of 20%. Brianna's portfolio has an expected rate of return of 11% and a standard deviation of 12%. The risk- free rate is 3%. According to the Sharpe measure,

A) Brianna has the better portfolio.
B) The answer depends on Allison and Brianna's risk tolerance.
C) Allison has the better portfolio.
D) The portfolio's are equally desirable.

Question 7

Phil has a portfolio with a 13.2% total return. The beta of the portfolio is 1.48 and the standard deviation is 13%. Currently, the risk- free rate of return is 4% and the overall market has a total return of 11%. What is the value of Treynor's measure for Phil's portfolio?

A) 7.1%.
B) 8.9%.
C) 6.2%.
D) 2.1%.

Question 8

Investors who wish to minimise the effect of taxes on their investment returns should try to avoid

A) bonds.
B) dividend paying shares.
C) short- term capital gains.
D) long- term capital gains.

Question 9

Sharpe's measure of portfolio performance compares the risk premium on a portfolio to

A) a broad- based market index such as the ASX 300 index.
B) the portfolio's beta.
C) the prevailing risk- free rate of return.
D) the portfolio's standard deviation of return.

Question 10

The ASX 100 Index is an appropriate benchmark for

A) diversified portfolios of large company shares.
B) diversified portfolios of mid- cap and small company shares.
C) diversified portfolios with a mix of large, small, and mid- cap shares.
D) portfolios diversified among several asset classes such as shares, bonds, and real estate.

Question 11

Six months ago, Suzanne purchased a share for $28 a share. Today she sold the share at a price of $32 a share. During the time she owned the share, she received a total of $1.30 in dividends per share. What is her holding period return?

A) 18.9%.
B) 37.8%.
C) 33.2%.
D) 16.6%.

Question 12

The theory behind the variable-ratio plan is to

A) keep the unit cost of the portfolio at a constant level.
B) passively buy and hold a wide variety of securities.
C) avoid selling any security for a capital gain, and thus indefinitely avoiding the capital gains tax.
D) time the cyclical movements of the share market and thereby "buy low and sell high."

Question 13

Which one of the following provides the greatest reduction in total risk?

A) Asset allocation.
B) Diversification.
C) Beta reduction.
D) Security selection.

Question 14

A portfolio has a total return of 10.5%, a beta of 0.72 and a standard deviation of 6.3%. The risk-free rate is 3.8%, the market return is 12.4%. Jensen's measure of this portfolio's performance is

A) 4.3%.
B) 9.3%.
C) 0.5%.
D) 7.9%.

Question 15

Under the variable- ratio plan, additional speculative investments are made when the ratio

A) of conservative investments to speculative investments increases by 10%.
B) of the realised rate of return falls below the desired rate of return by 1% or more.
C) of the value of the speculative investments to the total portfolio value drops below a predetermined level.
D) of the rate of return on the speculative investments exceeds the overall market return by 1% or more.

Question 16

Ten months ago, Junior purchased a share for $14 a share. The share pays a quarterly dividend of $0.50 per share. Today, Junior sold the share for $15 a share. What is his holding period return?

A) 16.7%.
B) 17.9%.
C) 10.0%.
D) 10.7%.

Question 17

Ella owns a share with a beta of 1.34 and a standard deviation of 16.4%. The share has a total return of 14.8%. The market risk premium is 8.5%, while the return on the market portfolio was 12.0%. What is the value of Sharpe's measure for Ella's portfolio?

A) 0.21
B) 0.69
C) 0.38
D) 0.90

Question 18

Which one of the following statements concerning formula plans is correct?

A) Formula plans are based on the adherence to a mechanical set of rules with regard to when to buy and/or sell.
B) Securities with very stable prices are best suited to nearly all formula plans.
C) The objective of most formula plans is to maximise profits.
D) The use of subjective judgment is important to the routine administration of most formula plans.

Question 19

The formula plan which requires the greatest management attention and is also the most aggressive is called the plan.

A) constant- dollar
B) variable- ratio
C) dollar- cost averaging
D) constant- ratio

Question 20

Which one of the following statements is correct concerning dollar-cost averaging plans?

A) The goal of dollar-cost averaging is current dividend income.
B) Dollar-cost averaging is an active trading strategy.
C) Dollar-cost averaging is a short- term trading strategy.
D) The goal of dollar-cost averaging is long- term capital appreciation.

Question 21

A portfolio has a total return of 14.5%, a beta of 1.54, and a standard deviation of 17.6%. If the risk-free rate is 4.5% and the market return is 10.2%, then Treynor's measure of this portfolio's performance is

A) 2.8%.
B) 6.5%.
C) 9.4%.
D) 3.7%.

Question 22

On February 19, 2010, Angela purchased 100 shares of ABC at a total cost of $1,712.50. She received a total of $125.00 in dividends and sold the shares today, February 22, 2011. Her net proceeds from the sale are $1,892.40. Angela has a marginal tax rate of 32%. Her tax rate on both her capital gains in excess of one year and her dividend income is 18%. What is Angela's after- tax holding period return on her investment in ABC stock?

A) 11.0%.
B) 14.6%.
C) 13.2%.
D) 12.1%.

Question 23

Maria purchased $5,000 of no- fee managed fund units just over a year ago. She received $136 in dividend income and $201 in long- term capital gains distributions. Today she sold her shares for $5,062. Maria is in the 25% marginal tax bracket. Capital gains with holding periods in excess of one year and dividend income are taxed at 15%. What is Maria's after- tax holding period return?

A) 6.8%.
B) 8.0%.
C) 6.0%.
D) 6.6%.

Question 24

A share has a total return of 16.4%, a standard deviation of 14.5% and a beta of 1.63. The market rate of return is 12.4%, while the market's Treynor measure is 6.3. What is the value of the Treynor measure of this portfolio?

A) 27.6%.
B) 6.3%.
C) 18.4%.
D) 2.5%.

Question 25

The general theory of dollar-cost averaging is

A) to buy more shares when prices are low and less when prices are high.
B) to equal the performance of market averages at the lowest dollar cost.
C) to sell as markets decline and buy as they begin to rise.
D) to time the market to take advantage of low share prices.

Question 26

The Sharpe's measure for Jane Smith's investment portfolio is 0.40, while the Sharpe's measure for the market is 0.30. This information suggests that Smith's portfolio

A) is overly diversified, and some securities should be sold to bring the portfolio in line with the market.
B) exhibits superior performance because its risk premium per unit of risk is above that of the market.
C) is inadequately diversified, and more securities should be added to the portfolio in order to bring it in line with the market.
D) exhibits poor performance because its risk premium per unit of risk is below that of the market.

Question 27

If a constant- dollar plan portfolio is profitable over the long run, the in value over time.

A) aggressive portion will decrease
B) conservative portion will remain constant
C) entire portfolio will remain constant
D) conservative portion will increase

Question 28

For a share investment, the dividend yield is calculated by

A) multiplying a share's semi- annual dividend by two.
B) dividing a share's price by its annual cash dividend.
C) dividing the annual change in the share's price plus its annual dividend amount by the beginning of the year price.
D) dividing a share's annual cash dividend by its price.

Question 29

On January 1, Tim's portfolio was valued at $432,098. During the year Tim received $10,563 in interest and $15,060 in dividends. He also sold shares at a net loss of $12,870 and used the proceeds to purchase another share. Tim did not contribute any more funds nor withdraw any funds during the year. On December 31 of the same year, Tim's portfolio was valued at $398,189. What is the holding period return for the year?

A) - 2.1%.
B) - 1.9%.
C) - 5.3%.
D) - 4.9%.

Question 30

Suppose the shares of the Chickadee Corporation traded seven times in the following sequence one day last week: 46, 45.88, 45.75, 45.50, 45.63, 46, 46.13. In this case, a limit order to sell at 46 would have been executed

A) only at 46, whereas a market order to sell would have been executed at 46.13.
B) between 46 and 46.13, whereas a market order to sell could have been executed anywhere between 45.50 and 46.13.
C) anywhere between 45.50 and 46.13, whereas a market order to sell would have been executed only at 46.
D) only at 46.13, and a market order to sell would have been executed between 46 and 46.13.

Question 31

The holding period return (HPR)

A) can be used to determine the actual total return on shares, bonds, and other investments for periods of one year or less.
B) is the most appropriate measure of returns for an investment period exceeding one year.
C) reflects only capital gains and losses for investment periods of one year or less.
D) calculates the annual dividend yield on shares or current interest yield on bonds.

Question 32

To form an assessment of the future performance of investments, investors should monitor

A) the Value Line Index.
B) the ASX 100 Index.
C) the All Ordinaries Average.
D) economic and market activity.

Question 33

Dollar-cost averaging is a procedure by which an investor

A) times investments in order to buy low and sell high.
B) maintains a constant ratio of conservative and aggressive investments.
C) buys more shares as its price increases.
D) invests a fixed dollar amount in a security at fixed intervals.

Question 34

When using a constant-dollar plan?

A) The percentage of funds in the speculative portion of the portfolio should increase over time.
B) The ratio of safe funds to speculative funds remains constant over time.
C) Gains from the speculative portion of the portfolio are transferred to the safe portion of the portfolio.
D) The amount of money in the speculative portion of the portfolio should decline over time.

Question 35

Which one of the following statements is correct if a portfolio has a Jensen measure of return of zero?

A) The market provides a better return on a risk- adjusted basis.
B) The portfolio outperformed the market on a risk- adjusted basis.
C) The portfolio earned exactly its expected return on a risk- adjusted basis.
D) The portfolio has a total return of zero percent.

Question 36

The holding period return for managed funds should be based on

A) capital gains distributions and dividends.
B) net asset value exclusively.
C) capital gains distributions exclusively.
D) dividend income exclusively.

Question 37

A stop-loss order may not protect an investor's profits if

A) the stop-loss price is never reached.
B) an unexpected event cause the price to drop steeply when the markets are closed.
C) the price enters a prolonged period of gradual decline.
D) the price drops even slightly below the stop price before the order can be executed.

Question 38

The primary risk in using a GTC limit sell order rather than a market order is that

A) the limit order may be executed at a price above the market price.
B) the limit order may not be executed.
C) the limit order expires at the end of the day and may not be executed.
D) the market price may exceed the limit price when the order is placed.

Question 39

On January 1, Stacy's portfolio was valued at $96,534. During the year Stacy received $3,285 in interest and $4,100 in dividends. She also sold one share at a gain of $850. The value of the portfolio on December 31 of the same year was $113,201. At the end of June, Stacy withdrew $5,000 from the portfolio. What is the holding period return for the year?

A) 27.2%.
B) 25.8%.
C) 25.1%.
D) 26.5%.

Question 40

Allison's portfolio has an expected return of 14% and a beta of 1.37. Brianna's portfolio has an expected rate of return of 11% and a beta of 1. The risk- free rate is 3% and the expected rate of return on the market is 12%. According to the Jensen's measure,

A) The portfolio's are equally desirable.
B) The answer depends on Allison and Brianna's risk tolerance.
C) Allison has the better portfolio.
D) Brianna has the better portfolio.

Question 41

An investor adopts a policy of investing in both an aggressive managed fund and a short- term bond fund. When the value of the aggressive fund exceeds 65% of the portfolio value, shares of that fund are sold such that the aggressive fund represents only 45% of the portfolio. This is an example of a plan.

A) dollar- cost averaging
B) constant- ratio
C) variable- ratio
D) constant- dollar

Question 42

Asset allocation should focus on

A) maximisation of current income.
B) selection of individual securities within an asset class.
C) the investor's financial and family situation.
D) maximisation of short- term profits.

Question 43

An investment portfolio should be built around the needs of the individual investor.

Question 44

Holding period return (HPR) captures total return performance by considering current income and capital gains and is most appropriate for holding periods of one year or less.

Question 45

A stop- loss order guarantees that an investor's unrealised profit will be protected.

Question 46

The key areas to monitor when evaluating your portfolio holdings are the overall performance of both the economy and the financial markets, and the returns on your investments.

Question 47

Dollar-cost averaging is a formula plan to purchase the same number of shares at regular intervals of time.

Question 48

Sharpe's measure is a measure of the risk premium per unit of total risk.

Question 49

Juan's investment portfolio was valued at $125,640 at the beginning of the year. During the year, Juan received $603 in interest income and $298 in dividend income. Juan also sold shares and realised $1,459 in capital gains. Juan's portfolio is valued at $142,608 at the end of the year. All income and realised gains were reinvested. No funds were contributed or withdrawn during the year. What is the amount of income Juan must declare this year for income tax purposes?

A) $19,328.
B) $901.
C) $2,360.
D) $0.

Question 50

The process of selling certain issues in a portfolio and purchasing new ones to replace them is known as

A) dollar-cost averaging.
B) portfolio revision.
C) market timing.
D) red herring baiting.

Question 51

The two primary media for warehousing liquidity are

A) certificates of deposit and long- term bond funds.
B) money market managed funds and money market deposit accounts.
C) certificates of deposit and short- term bond funds.
D) short- term bond funds and asset allocation funds.

Question 52

The holding period return measures only the capital appreciation of an investment.

Question 53

Only capital gains that have been realised should be included in the measurement of a portfolio's return over a given period of time.

Question 54

Marti is 31 years old and is saving for retirement. Which one of the following portfolio allocations might best suit her situation if she is willing to accept a fair amount of risk in exchange for long- term capital appreciation?

A) 50% mortgage bonds, 5% money market, 45% government bonds.
B) 5% money funds, 10% bonds and 85% growth shares.
C) 60% bonds, 15% money funds and 25% real estate.
D) 25% bank CDs, 40% corporate bonds, 15% money market, 20% value shares.

Question 55

Investors need to monitor economic and market activity to assess the potential impact these factors can have on their investment portfolios.

Question 56

Once you establish a portfolio designed to achieve your investment goals, you can relax and forget about your investments until such time as you need the funds.

Question 57

Dollar-cost averaging is a formula plan which automatically causes investors to purchase more shares when the price is low and purchase fewer shares when the price is high.

Question 58

An investor's portfolio should only contain securities that are suitable to the investor's goals and needs.

Question 59

Sharpe measures total risk while Treynor and Jensen measure only systematic risk.

Question 60

Sharpe's measure of portfolio performance compares the risk premium on a portfolio to the portfolio's standard deviation of return.

Question 61

A constant- dollar plan allows for speculative gains while limiting potential losses.

Question 62

Formula plans are high- risk investment strategies that attempt to benefit from cyclical price movements.

Question 63

Utility shares are often suitable for low- risk, current- income- oriented portfolios.

Question 64

A rational investor will require the same return from a corporate security as from a government security.

Question 65

Sharpe's measure of portfolio performance adjusts for risk by dividing total portfolio return by the portfolio beta.

Question 66

If the holding period return (HPR) of an investment is 20 percent before taxes for a nine month period, an investor in the 30 percent tax bracket would have an after- tax HPR of 14 percent.

Question 67

Sharpe's measure, Treynor's measure, and Jensen's measure all focus on non- diversifiable risk.

Question 68

Before analysing needs and objectives, investors should first construct a portfolio.

Question 69

Investors who use formula plans believe that they have above average ability to time the market and pick successful investments.

Question 70

The ASX 300 Index can be used to represent the share market as a whole.

Question 71

Asset allocation focuses on selecting specific securities within an asset class.

Question 72

An investor who wants to take advantage of a temporary decline in the price of a share should use a limit order.

Question 73

A Jensen measure of 2.5% means that a security earned 2.5% more than the overall market.

Question 74

If an investor has a loss position in an investment and wants to sell it, the best time to sell for tax purposes is when a capital gain is available against which the loss can be applied.

Question 75

Portfolio revision is the ongoing process of systematically studying the issues in the portfolio and selling certain issues and purchasing others as the means of maintaining a portfolio that best meets the investor's objectives.

Question 76

A conservative asset allocation would rely heavily on bonds and short- term securities.

Question 77

Over a period of time if an investment has not met its return objective, it should be sold.

Question 78

A constant- ratio plan requires an investor to continually rebalance the portfolio.

Question 79

Jensen's measure of portfolio performance compares the risk premium on a portfolio to the portfolio's beta.

Question 80

Most investment professionals consider the ASX 100 to be the most appropriate comparative gauge for evaluating the investment performance of a broadly based ordinary share portfolio.