Questions relate to Portfolio Management.

1.

Which of the following statements is least accurate? An investor may construct

a portfolio located on the capital market line (CML) by:
A. investing a portion of his capital in the risk-free asset and the balance in a
fully diversified portfolio of all equities.
B. investing a portion of his capital in the risk-free asset and the balance in a
fully diversified portfolio of all risky assets.
C. borrowing capital at the risk-free rate and investing all his capital plus all
borrowed capital in a fully diversified portfolio of all risky assets.

2. The least likely reason for constructing an investment policy statement is that it:
A. minimizes the costs of portfolio construction.
B. helps investors create realistic investment goals.
C. establishes a performance benchmark to judge manager performance.

3. An analyst gathered the following information about two common stocks:

Variance of returns for the Libby Company = 15.5

Variance of returns for the Metromedia Company = 22.3
Covariance between returns of Libby Company and Metromedia Company
=
8.65

The correlation coefficient between returns for the two common stocks is closest
to:
A. 0.025.
B. 0.388.
C. 0.465.

4. According to the Capital Asset Pricing Model (CAPM), the market portfolio:
A. includes all risky assets invested in equal amounts.
B. is exposed to both unsystematic and systematic risk.
C. is perfectly positively correlated with other portfolios on the CML.

5. An investment strategy that seeks to grow portfolio value over time through
capital gains and reinvestment of current income is most likely appropriate if the
investment objective is:
A. total return.
B. current income.
C. capital preservation.

6.

The standard deviation of returns for shares of Oakmont Corporation and Sunrise
Corporation are 14% and 12% respectively. If the correlation between the two
stocks is 0.25, a portfolio consisting of 35% invested in Oakmont and 65% in
Sunrise has a standard deviation closest to:
A. 10.2%
B. 12.7%
C. 35.0%

7. Factors such as fluctuations in interest rates and changes in industrial production

contribute to:
A. systematic risk.
B. unsystematic risk.
C. both systematic and unsystematic risk.

8. When assessing the performance of a single investment fund, the asset allocation
decision explains:
A. a little less than 100% of the level of a funds returns.
B. about 90% of the funds variation in returns across time.
C. an average of 40% of the variation in returns of a fund across time.

9. According to the Capital Asset Pricing Model (CAPM) if investors borrow at a rate
that exceeds the risk-free lending rate the resulting borrowing portfolios will:
A. plot on a flatter line.
B. plot on a steeper line.
C. no longer plot on a straight line.

10. Which of the following is not an assumption of the Markowitz model? Investors:
A. have homogeneous expectations.
B. maximize one-period expected utility.
C. base decisions solely on expected return and risk.

11. The table below provides a probability distribution of stock returns for shares of
Orion Corporation:
Rate of
Probability Return (%)
0.15
-12
0.60
11
0.25
18
The variance of returns for Orion Corporation stock is closest to:
A. 44.36
B. 50.94
C. 88.71

12. For a retired 65-year-old investor, with moderate risk tolerance and adequate insurance
and cash reserves, the appropriate portfolio will most likely have the following mix of
bonds and stocks:
A
B
C

13.

Bonds
55-65%
30-40%
15-50%

Stocks
35-45%
60-70%
50-85%

In general, which of the following institutions will most likely have a high need for
liquidity and a short investment time horizon?
A. Banks
B. Endowments
C. Defined benefit pension plans

14.

Which of the following is most likely a part of the feedback step in the portfolio
management process?
A. Portfolio construction
B. Performance measurement
C. Developing the investment policy statement

15.

The following table presents historical information for two stocks, RTF and KIU:
Variance of returns for RTF
Variance of returns for KIU
Correlation coefficient between RTF and KIU

0.0625
0.0900
0.4500

The covariance between RTF and KIU is closest to:

A. 0.0025.
B. 0.0338.
C. 0.0675.

16.

Relative to an investor with a steeper indifference curve, the optimal portfolio for an
investor with a flatter indifference curve will most likely have:
A. a lower level of risk and return.
B. a higher level of risk and return.
C. the same level of risk and return.

17.

The following table shows data for the stock of JKU and a market-index.
Expected return of JKU
Expected return of market index
Risk free rate
Standard deviation of JKU returns
Standard deviation of market index returns
Correlation of JKU and market index returns

15%
12%
5%
20%
15%
0.75

Based on the capital asset pricing model (CAPM), JKU is most likely:
A. overvalued.
B. undervalued.
C. fairly valued.

18.

A portfolio with equal parts invested in a risk-free asset and a risky portfolio will most
likely lie on:
A. the efficient frontier.
B. the security market line
C. a capital allocation line.