Deck 11: Managing a Stock Portfolio: a Worldwide Issue

Question 1

An index fund that uses futures to hold the S&P 500 Index and invests the remainder in bonds would be an example of:

A) a value index fund.
B) a derivatives index fund.
C) an enhanced index fund.
D) an active index fund.

Answer 1

C

Question 2

The required rate of return for a common stock is defined as the:

A) expected return given an assumed set of probabilities and expected cash flows on the stock.
B) maximum expected return based on estimates of expected cashflows from the stock.
C) minimum expected return necessary to induce an investor to purchase the stock. expected return after evaluation of the risk on the stock has been taken.

Answer 2

C

Question 3

The passive investment strategy does not try to find undervalued stocks nor time the market. Instead, it is concerned with:

A) achieving returns available in various market sectors at minimum risk.
B) achieving maximum returns available in various market sectors.
C) achieving minimum risk in various market sectors.
D) achieving returns available in various market sectors at minimum cost.

Answer 3

D

Question 4

If investors in the market become more pessimistic, it is expected that the required return will ----------.

A) decrease.
B) increase.
C) stay the same.
D) there is not enough information to answer the question.

Question 5

Which of the following is NOT considered a passive equity investment:

A) investing in a sector ETF.
B) investing in a S&P 500 index mutual fund.
C) investing in a multi-strategy hedge fund.
D) investing in a Russell 2000 index mutual fund.

Question 6

A bear market is one characterized by a decline of:

A) 10% or more.
B) 15% or more.
C) 20% or more.
D) 25% or more.

Question 7

For adequately diversified common stock portfolios, market effects often account for -------- percent and more of the variability of the portfolio's return.

A) 60
B) 70
C) 80
D) 90

Question 8

Individual investors consider the investment decision:

A) based on market and economic conditions as consisting of asset allocation.
B) based on market and economic conditions as consisting of asset allocation and security selection.
C) based on objectives, constraints, and preferences, as consisting of asset allocation.
D) based on objectives, constraints, and preferences, as consisting of asset allocation and security selection.

Question 9

From 1989 to April 2003, the Japanese stock market lost what percent of its value?

A) 50
B) 60
C) 70
D) 80

Question 10

Which of the following statements regarding a buy and hold strategy are true?

A) There are no selection choices to be made under this strategy.
B) This strategy is applicable only to large portfolios.
C) There is no reinvestment decision to make under this strategy.
D) This strategy produces lower transactions and search costs.

Question 11

The -------------- provides investors with a method of calculating a required return for a stock.

A) dividend discount model
B) risk-free rate
C) Fisher model
D) Capital Asset Pricing Model

Question 12

If security markets are totally efficient, the best common stock strategy to take is:

A) an asset allocation approach.
B) the modern portfolio theory.
C) an active strategy.
D) a passive strategy.

Question 13

Which of the following is TRUE regarding fluctuations in both individual stock prices and portfolios of stocks?

A) aggregate market movements are the largest single factor explaining these fluctuations
B) beta is the largest single factor explaining these fluctuations
C) standard deviation of returns is the largest single factor explaining these fluctuations
D) financial risk is the largest single factor explaining these fluctuations

Question 14

Which of the following statements concerning index funds and actively managed funds is true?

A) Their performance is about equal.
B) They tend to have an inverse relationship.
C) Actively managed funds tend to outperform index funds.
D) Index funds tend to outperform actively managed funds.

Question 15

One of the most famous investment advisory services since 1965 is:

A) The Wall Street Journal
B) Standard and Poor's Corporate Records
C) Moody's
D) Value Line Investment Survey

Question 16

A general consensus of analysts is that a typical investor should have between ___ and ______ percent of his/her portfolio in international markets.

A) 5: 10
B) 10: 20
C) 20: 30
D) 30: 40

Question 17

The most important decision to make when building a diversified stock portfolio is:

A) individual security analysis.
B) asset allocation.
C) minimization of market risk.
D) maximization of expected return.

Question 18

Passive common stock strategies attempt to minimize:

A) capital losses.
B) transactions costs, including time spent managing the portfolio.
C) market risk.
D) company and industry risk.

Question 19

Investors following a passive strategy use which of the following as the best estimate of a security's value?

A) the dividend discount model.
B) Fisher model.
C) current market price.
D) current earnings per share.

Question 20

A significant advantage of index funds is their:

A) lower market price than other types of funds.
B) sector rotation.
C) tax efficiency.
D) minimization of risk.

Question 21

Historically, sell-side equity research has typically been _________to the target company?

A) very unfavorable
B) unfavorable
C) favorable
D) neutral

Question 22

Commodity ETF's are mainly used as speculative plays by:

A) hedge fund traders.
B) conservative investors.
C) mutual fund managers.
D) value investors.

Question 23

All of the following represent requirements for conducting effective sector rotation, EXCEPT

A) an accurate assessment of current economic conditions.
B) a knowledge and understanding of the phases of the business cycle.
C) an understanding of the political environment.
D) expertise in technical analysis.

Question 24

If stock prices reflect their approximate fair value after transactions costs are taken into account, this is known as:

A) after-cost efficiency.
B) economic efficiency.
C) a market in equilibrium.
D) an efficient market.

Question 25

Market timers attempt to earn excess returns by:

A) adjusting the ratio of aggressive equity securities to defensive equity securities.
B) shifting the mix of short-term securities to long-term securities.
C) varying the percentage of portfolio assets in equity securities.
D) adjusting the ratio of primary market securities to capital market securities.

Question 26

An analyst employed by a pension fund to search for stocks for the fund to invest in would be referred to as:

A) a sell-side analyst.
B) a buy-side analyst.
C) an institutional analyst.
D) a money manager.

Question 27

A general guideline is that investors should probably have at least 20 percent of their portfolio invested in emerging markets.

Question 28

The nominal risk-free rate of return is calculated by subtracting an expected inflation premium from the real risk-free rate of interest.

Question 29

The Merrill Lynch case in 2002 confirmed that many analysts:

A) were paid too much.
B) were unable to accurately pinpoint earnings.
C) gave buy recommendations to win investment banking business.
D) shared private information about companies with investors.

Question 30

The Coffeehouse Portfolio suggests investors hold:

A) 50% bonds, 50% equities (including the S&P 500, Large Cap Value, International, Small Cap, and Small Cap Value stocks)
B) 40% bonds, 60% equities (including the S&P 500, Large Cap Value, International, Small Cap, Small Cap Value, and REITs)
C) 60% bonds, 40% equities (in two index funds)
D) 40% bonds, 60% equities (in two index funds)

Question 31

How can investors reasonably justify buy actively managed funds instead of index funds?

A) higher management fees usually suggests better performance
B) the fund consistently outperformed the market, net of fees, and is expected to continue to do so
C) the fund outperformed the S&P 500 by 4% last year
D) the portfolio manager is new and considered a star analyst

Question 32

If security prices fully reflect all relevant information available and usable, a securities market is said to be:

A) rational.
B) in equilibrium.
C) effective.
D) efficient.

Question 33

The so-called "global settlement" negotiated by the SEC, NYSE and NASD with a number of brokerage firms was intended to:

A) ensure more disclosure of relevant information to investors.
B) separate investment banking from analyst research.
C) stop the practice of buy, sell or hold recommendations in analysts' reports.
D) all of the above

Question 34

What is usually considered the biggest risk of market timing?

A) getting out of the market too soon
B) high transactions costs
C) failing to adjust for short-term corrections
D) not being in the market at critical times

Question 35

----------- shifts the weights of securities in the portfolio to take advantage of areas expected to do relatively better than others.

A) Portfolio management
B) Technical analysis
C) Momentum strategy
D) Sector rotation

Question 36

Sector rotation is

A) one form of passive investing.
B) an active strategy similar to stock selection.
C) an attempt to earn excess returns by varying the percentage of assets in the portfolio.
D) not dependent on an accurate assessment of current economic conditions.

Question 37

Which of the following statements regarding defensive stocks is true?

A) They are often expected to have above-average future growth.
B) They often have high P/E multiples.
C) They are expected to be adversely affected by high interest rates.
D) They often produce necessary items such as food and prescription drugs.

Question 38

Market risk is the single most important risk affecting the price movements of common stocks.

Question 39

The central focus of a security analyst's job is to:

A) ascertain the accuracy of financial statements of selected companies.
B) find growth stocks.
C) forecast a specific company's return.
D) determine the market demand for a specific company's stock.

Question 40

____________ funds are especially popular with momentum investors.

A) Sector
B) Managed
C) Global
D) Index

Question 41

Sector rotation would be very successful in a truly efficient market.

Question 42

A utility stock is more likely to have a beta lower than the overall market.

Question 43

Buy side analysts will more likely have a potential conflict of interest in a stock than a sell-side analyst.

Question 44

How is the required rate of return utilized in stock analysis?

Question 45

Index funds are considered relatively tax efficient since they rarely have short-term gains.

Question 46

What are the major reasons investing in index funds works, according to Burton Malkiel?

Question 47

One of the major benefits of employing a buy and hold strategy is the savings on trading costs.

Question 48

Compare and contrast the passive strategies of buy-and-hold and buying index funds.

Question 49

How could one invest indirectly in sectors and practice sector rotation?

Question 50

If security prices fully reflect all the relevant information that is available and usable, then a securities market is considered to be efficient.

Question 51

As evidence about the efficiency of stocks markets has grown, so have index funds.

Question 52

Due to advances in technology and better understanding of stocks and financial markets, security analysts' estimates have become more accurate.

Question 53

What is meant by the term "defensive stocks?" Give some examples.

Question 54

Security analysts receive all of their information from the management of the company.

Question 55

The primary emphasis in fundamental security analysis is on expected sales of the company.

Question 56

With respect to proper diversification in asset allocation, what are the general guidelines for a U.S. investor's portfolio regarding foreign securities?

Question 57

Under new SEC rules adopted in 2002, price targets for stocks are to be shown.

Question 58

In an upward trending market, what sectors might investors consider to increase absolute returns?

Question 59

A common asset allocation for a number of institutional investors using only two asset classes is 60 percent equities and 40 percent bonds.

Question 60

An investor using the buy-and-hold strategy will receive dividends to reinvest. What dividend option do many companies offer that would make this strategy even more passive?

Question 61

What is the paradox regarding fundamental analysis in regard to the efficient market hypothesis (EMH)?

Question 62

What are the four broad stock sectors? What is sector rotation? Explain what changes in the business cycle would prompt one to rotate from one sector to another.