Deck 17: Investment Management

Question 1

Risk tolerance refers to the tradeoff between risk and ___ demanded by a particular investor.

A) promised yield
B) expected volatility
C) expected return
D) internal rate of return

Answer 1

C

Question 2

The results of security analyst's report typically include

A) an earnings forecast.
B) a forecast of the stock price in one year.
C) a code for the stock representing buy, sell, or hold.
D) an expected rate of return without a time frame.

Answer 2

C

Question 3

The last step in the five step investment is to

A) construct a portfolio.
B) set investment policy.
C) revise the portfolio.
D) evaluate portfolio performance.

Answer 3

D

Question 4

Specialty investment firms typically

A) have a hierarchical analysis and decision structure.
B) invest in market indexes.
C) use investment committees.
D) have their portfolio managers do the security analysis.

Question 5

If an investor has a risk tolerance of 8, this means he

A) is a risk taker.
B) will accept 8 additional units of variance for an additional 1% expected return.
C) will accept 1 additional unit of standard deviation for an additional 8% expected return.
D) will accept 8 units of standard deviation for an additional 1% expected return.

Question 6

___ is a component of the investment process that involves identifying which assets to invest in and determining the proportion of funds to invest in each of the assets.

A) investment policy
B) security selection
C) portfolio revision
D) portfolio evaluation

Question 7

In the world of security analysis and portfolio construction, ___ is the process of buying and holding a well-diversified portfolio.

A) passive management
B) the active investment system
C) the "buy-and-hold" strategy
D) portfolio integration

Question 8

The first step in the five step investment decision is to

A) construct a portfolio.
B) set investment policy.
C) revise the portfolio.
D) evaluate portfolio performance.

Question 9

For a particular investment the ___ is the return on a risk free investment that makes the investor indifferent between the risky and risk free investment.

A) risk premium
B) adjusted volatility
C) prime rate
D) certainty equivalent return

Question 10

Periodically repeating the process of setting investment policy, conducting security analysis, and constructing a portfolio is known as

A) security selection
B) asset allocation
C) market timing
D) portfolio revision.

Question 11

A relatively new method in which the portfolio manager may make major changes in the proportion of funds invested in different asset classes at relatively low transaction costs involves the use of

A) risk free securities
B) synthetic forward contracts
C) equity and interest rate swaps
D) split funding

Question 12

An investment firm's approved list is generally set by its

A) investment committee
B) CEO.
C) brokers.
D) portfolio managers.

Question 13

To have a linear indifference curve, the axes must be

A) expected return and beta.
B) riskfree return and variance.
C) expected return and variance.
D) expected return and standard deviation.

Question 14

Swap bank activities that set up equity, interest rate, and other kinds of swaps between interested counterparties is subject to

A) investment standards set by the SEC
B) offshore standards set by the state government
C) heavy regulation by the FTC
D) little if any government regulations

Question 15

In the traditional investment management organization, the ___ includes the senior management who are responsible for establishing broad investment strategy.

A) investment committee
B) board of directors
C) security analyst committee
D) market expert committee

Question 16

An investor has a choice between a riskfree return of 5% and a portfolio with expected return of 12% and variance of 9%. She chooses a portfolio with 25% in the riskfree and 75% in the portfolio. The investor's level of risk tolerance is

A) 1.93.
B) 4.76.
C) .91.
D) 8.72.

Question 17

Asking an investor to choose the point on the linear efficient set is asking him to identify the

A) tangency point of his indifference curve.
B) market portfolio.
C) lending rate.
D) riskfree rate.

Question 18

The vertical intercept of an investor's linear indifference curve is the investor's

A) slope.
B) efficient tangency.
C) certainty equivalent return.
D) optimal portfolio.

Question 19

The investment style known as ____ involves an active decision to the appropriate allocation of funds between a surrogate market portfolio and a riskfree asset.

A) risk adjustment
B) security selection
C) market timing
D) sector rotation

Question 20

Setting investment policy involves the identification of the client's ___, particularly as regards their attitude toward risk.

A) investment objectives
B) ideal portfolio
C) latest available insider information
D) benchmark portfolio

Question 21

Deciding what proportion of a total portfolio will be placed into a chosen portfolio of common stocks and into a chosen portfolio of bonds is called

A) group selection.
B) asset allocation.
C) security selection.
D) indifference analysis.

Question 22

Two rationales for the practice of splitting a client's assets between several investment managers are

A) diversification of style and diversification of judgment
B) diversification of risk and diversification of style
C) diversification of systematic risk and diversification of non-systematic risk
D) diversification of interest-rate risk and diversification of reinvestment risk.

Question 23

A slightly overpriced stock should

A) generally be held in a smaller amount in an investor's portfolio
B) be given a zero weight by a risk averse investor
C) be considered by an investor who has no concern for the covariance with other securities in the portfolio
D) not be considered for a buy-and-hold strategy

Question 24

In which of the following steps would the portfolio manager determine which securities to buy or sell?

A) security analysis
B) portfolio revision
C) portfolio construction
D) portfolio evaluation

Question 25

Which of the following reasons would NOT explain why it is so difficult to specify the risk-return preferences of investment management clients?

A) It is difficult to translate subjective and ill-defined feelings into quantitative terms.
B) Most investors have only a vague understanding of their own risk-return preferences.
C) Even under questioning, clients will give seemingly inconsistent answers to similar questions.
D) Investors usually have more concern about the target for short-run returns than long-run returns.

Question 26

With respect to asset allocation decisions, which one of the following is NOT regarded as an asset?

A) an interest-rate swap
B) real property
C) preferred stock
D) debentures

Question 27

A passive portfolio manager

A) does not consider the investor's indifference curve.
B) actively trades mispriced securities.
C) changes the mix when the riskfree rate changes.
D) does not recognize consensus opinions.

Question 28

Split-funding refers to a pension fund

A) using market timing.
B) including domestic and international common stocks.
C) allocating funds between a riskfree asset and a common stock portfolio.
D) have two or more managers.

Question 29

A strong appeal to investment managers concerning the swap market is the fact that the market is

A) perfectly efficient
B) unregulated by any government agency with oversight responsibilities
C) composed of products that may not qualify as assets on a balance sheet
D) relatively new and growing in size

Question 30

A stock portfolio consists of stocks A, B, and C in the proportions of .3, .5, .2. A bond portfolio consists of bonds X and Y in the proportions of .75, .25. For the total portfolio, common stocks will be .6; bonds will be .4. The total portfolio percentage of Stock C will be

A) 12%.
B) 16%.
C) 18%.
D) 20%.

Question 31

In a traditional investment management organization, which of the following groups would be MOST influential in setting investment strategy?

A) The investment committee
B) The board of directors
C) The security analyst committee
D) The market expert committee

Question 32

Active portfolio managers

A) typically have larger fees than passive managers.
B) tend to purchase index funds.
C) have traditionally outperformed passive managers.
D) assume the market is efficient.

Question 33

A basic assumption made by the active portfolio managers is that securities markets are

A) strong-form efficient
B) semistrong-form efficient
C) perfectly efficient
D) inefficient

Question 34

If a client has constant risk tolerance, he or she requires ______ expected returns to compensate for additional units of risk.

A) constant
B) less
C) more
D) more diversified

Question 35

The job of the portfolio manager is to identify the portfolio with the

A) highest risk-return tradeoff
B) highest certainty equivalent return
C) lowest risk and highest return
D) best return given a distant investment horizon

Question 36

For a linear indifference curve, the objective is to find the portfolio such that the investor has

A) the steepest, positive slope.
B) the smallest intercept.
C) a slope of 0.
D) the largest intercept.

Question 37

Which one of the following is a legitimate reason given to revise portfolios over time?

A) The investment characteristics of stocks usually remain the same while market conditions will change.
B) Transaction costs will be less in the long run.
C) Many managers tend to invest the portfolios of all their clients in a similar manner which may be at odds with the investors risk-return preferences
D) Adjustments must be made if the investor has a specific beta target for his or her portfolio.

Question 38

Which one of the following statements is correct concerning the one stage approach being theoretically superior vis-a-vis the two-stage approach to security selection?

A) The two-stage approach allows managers too much freedom to violate the risk-return preferences of the client.
B) The two-stage approach does not allow managers to specialize in one particular asset class.
C) The one-stage approach is superior because it uses all available information relevant to the construction of an optimal portfolio.
D) The one-stage approach is preferred by most investment managers because it is simpler and cheaper to implement.

Question 39

Which one of the following would cause a change to a portfolio that is passively managed?

A) a more attractive sector is found
B) the passing of another calendar year
C) a change in the client's risk-return preferences
D) a new issue of a relatively stable security is announced