Deck 13: Managing Your Own Portfolios

Question 1

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

Answer 1

A

Question 2

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.

Answer 2

True

Question 3

Fixed weightings, flexible weightings, and tactical asset allocation are three approaches to asset allocation.Compare and contrast these three different approaches.

Answer 3

The fixed weightings approach assigns a fixed percentage of the portfolio to each asset category.This percentage is held constant over time.The flexible weightings approach assigns a percentage of a portfolio to each asset category but these weightings are changed periodically in response to changes in the overall market.Tactical asset allocation is a form of market timing that uses stock-index futures and bond futures to change a portfolio's asset allocation.

Question 4

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

Question 5

The fixed-weightings approach to asset allocation

A) is based on an allocation of an equal percentage of the portfolio to each separate asset category.
B) requires periodic rebalancing of the portfolio to maintain the desired weights.
C) is based on periodic adjustments to category weights in response to market changes.
D) uses stock-index futures and bond futures in a market timing strategy.

Question 6

The S&P 500 Stock Composite Index and the NASDAQ Composite Index can be used to represent the stock market as a whole.

Question 7

An moderate asset allocation alternative might include
I)bonds.
II)common stocks.
III)foreign securities.
IV)options and commodities futures.

A) I & II only
B) I, III and IV only
C) I, II, and III only
D) I, II, III and IV

Question 8

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

Question 9

An asset allocation plan should consider which of the following factors?
I)economic outlook
II)capital preservation
III)changing investment goals
IV)investor risk tolerance

A) II only
B) II, III and IV only
C) I, III and IV only
D) I, II, III and IV

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

The Dow Jones Industrial Average (DJIA)includes 500 of the largest companies traded on U.S.exchanges.

Question 16

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

A) diversification
B) asset allocation
C) security selection
D) beta reduction

Question 17

Most investment professionals consider the Dow Jones Industrial Average (DJIA)to be the most appropriate comparative gauge for evaluating the investment performance of a broadly based common stock portfolio.

Question 18

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

Question 19

Asset allocation should focus on

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

Question 20

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 21

The holding period return for mutual funds should be based on

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

Question 22

The holding period return calculation for a portfolio time-weights portfolio additions and deletions in accordance with the number of months they were in the portfolio.

Question 23

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 stock 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) 25.1%
B) 25.8%
C) 26.5%
D) 27.2%

Question 24

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

Question 25

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

Question 26

Returns for periods greater than one year should be measured using the internal rate of return.

Question 27

The S & P 500 Index is an appropriate benchmark for

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

Question 28

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

A) The S&P 500 Index.
B) The Value Line Index.
C) The Dow Jones Industrial Average.
D) economic and market activity

Question 29

To compute the holding period return on a bond investment, the investor should divide the purchase price of the bond into

A) any increase or decrease in the bond's price.
B) the annual coupon payment.
C) the bond's yield to maturity.
D) coupon payments received plus or minus any change in the bond's price.

Question 30

The holding period return (HPR)of one's portfolio should be compared to investment goals
I)to assess whether the proper rate of return is being earned for the risk involved.
II)to be sure one's portfolio is outperforming the S&P 500 Index.
III)to isolate any problem investments.
IV)to determine when to change benchmarks from the S&P 500 to the NASDAQ Composite Index.

A) I and III only
B) II and IV only
C) I, II, and III only
D) II, III, and IV only

Question 31

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

Question 32

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 33

Lipper indexes are to assess the performance of
I)equity funds.
II)bond funds.
III)money market funds.
IV)Real Estate Investment Trusts (REITS).

A) I and II only
B) I and III only
C) I, II, and III only
D) I, II, III, and IV

Question 34

The holding period return (HPR)

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

Question 35

For a stock investment, the dividend yield is calculated by

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

Question 36

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

Question 37

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

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

Question 38

If an investor's portfolio is comprised of a broad range of common stocks, the best measure to use as a basis of comparison of performance is the

A) Dow Jones Industrial Average (DJIA).
B) S&P 500 index.
C) Dow Jones Corporate Bond Index.
D) American Stock Exchange utilities index.

Question 39

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 of stock and realized $1,459 in capital gains.Juan's portfolio is valued at $142,608 at the end of the year.All income and realized 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) $0
B) $901
C) $2,360
D) $19,328

Question 40

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 41

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

A) a broad-based market index such as the S&P 500 index.
B) the portfolio's standard deviation of return.
C) the portfolio's beta.
D) the prevailing risk-free rate of return.

Question 42

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

Question 43

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 44

Maria purchased $5,000 of no-load mutual fund shares 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) 6.0%
B) 6.6%
C) 6.8%
D) 8.0%

Question 45

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

Question 46

On February 19, 2004, Angela purchased 100 shares of ABC stock at a total cost of $1,712.50.She received a total of $125.00 in dividends and sold the stock today, February 22, 2005.Her net proceeds from the sale are $1,892.40.Angela has a combined state and federal marginal tax rate of 32%.Her combined state and federal 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) 12.1%
C) 13.2%
D) 14.6%

Question 47

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

Question 48

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 stock at a net loss of $12,870 and used the proceeds to purchase another stock.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) -5.3%
B) -4.9%
C) -2.1%
D) -1.9%

Question 49

Ella owns a stock with a beta of 1.34 and a standard deviation of 16.4%.The stock 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) 0.38
C) 0.69
D) 0.90

Question 50

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

Question 51

An investor in the 25% marginal tax bracket purchased a bond for $983, received $85 in interest, and then sold the bond for $955 after holding it for six months.The tax rate for capital gains with holding periods in excess of one year is 15%.What are the pre-tax and post-tax holding period returns?

A) 5.8%; 4.3%
B) 6.0%; 4.5%
C) 5.8%; 4.5%
D) 6.0%; 4.3%

Question 52

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

Question 53

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

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

Question 54

A problem investment

A) requires immediate attention.
B) is one you would buy if you did not already own it.
C) is defined as any investment with unrealized losses.
D) should be left alone and given time to correct itself.

Question 55

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

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

Question 56

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

Question 57

Which of the following are reasons to consider selling an investment that is currently in a portfolio?
I)The investment has met the original objective.
II)Better investment opportunities currently exist.
III)The outlook for the investment has improved.
IV)The investment has not met expectations and no change is expected.

A) I, II and IV only
B) I, III and IV only
C) I, II and III only
D) I, II, III and IV

Question 58

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

Question 59

Tim purchased a stock ten months ago for $14 a share, received a $1 dividend per share last month, and sold the stock 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?

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

Question 60

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

Question 61

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 62

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

Question 63

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%.According to the Treynor measure,

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

Question 64

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

Question 65

The Witney Growth Fund, a no-load mutual fund, had a net asset value per share of $54.28 one year ago.Its current net asset value is $56.93.During the year it paid out dividends and capital gains of $2.08 per share.It has a beta value of 1.75.Over the same period the market return was 6.4% and the risk-free rate of return was 3.5%.
(a)Calculate Treynor's measure for the Witney Growth Fund.(Show all work.)
(b)Based on Treynor's measure, how did the fund perform in relation to the overall market?

Question 66

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

Question 67

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

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

Question 68

Which of the following measures is based on the capital asset pricing model?

A) Only Sharpe's measure
B) Only Treynor's measure
C) Only Jensen's measure
D) Both Treynor's and Jenson's measures

Question 69

Explain the type of risk measured by each of the following measures.Also identify the factor in each formula that determines the type of risk that is being measured.
(a)Jensen's measure
(b)Sharpe's measure
(c)Treynor's measure

Question 70

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) 3.7%.
C) 6.5%.
D) 9.4%.

Question 71

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

Question 72

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

Question 73

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

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

Question 74

One year ago, Matt bought 100 shares of ACE Corp.stock for $5,619 including commission.He is about to sell the ACE stock for $6,528 net of commissions.When he made the purchase the S&P 500 index was at 907; now it is 1070.The beta of ACE stock is 0.98, and the market's risk-free rate is 4.0%.No dividends were paid.Based on Jensen's measure, did Matt make a good purchase?

Question 75

Treynor's measure of portfolio performance focuses on

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

Question 76

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

Question 77

Which of the following statements about Jensen's measure are correct?
I)Through its use of the capital asset pricing model, Jensen's measure automatically adjusts for market return.
II)In general, the higher the Jensen's measure, the better a portfolio has performed.
III)Jensen's measure is referred to as alpha.
IV)A positive Jensen's measure indicates an investment has underperformed the market on a risk-adjusted basis.

A) I and IV only
B) I, II and III only
C) II and III only
D) I, III and IV only

Question 78

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

Question 79

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

Question 80

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