Chapter 5 questions portfolio managment questions PDF

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Chapter 5 questions portfolio managment questionsChapter 5 questions portfolio managment questionsChapter 5 questions portfolio managment questionsChapter 5 questions portfolio managment questionsChapter 5 questions portfolio managment questionsChapter 5 questions portfolio managment questionsChapte...

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Chapter 5: The Modern Portfolio Theory Part 1: True or False Questions 1) Portfolio objectives should be established before beginning to invest. 2) A portfolio that offers the lowest risk for a given level of return is known as an efficient portfolio. 3) By plotting the efficient frontier, investors can find the unique portfolio that is ideal for all investors. 4) Portfolio objectives should be established independently of tax considerations. 5) If the actual rate of return on an investment portfolio is constant from year to year, the standard deviation of that portfolio is zero. 6) An efficient portfolio maximizes the rate of return without consideration of risk. 7) Negatively correlated assets reduce risk more than positively correlated assets. 8) Correlation is a measure of the relationship between two series of numbers. 9) Most assets show a slight degree of negative correlation. 10) Investing globally offers better diversification than investing only domestically. 11) Studies have shown that investing in different industries as well as different countries reduces portfolio risk. 12) Coefficients of correlation range from a maximum of +10 to a minimum of -10 13) In severe market downturns different asset classes become less correlated. 14) Investing in emerging markets is an effective means of diversifying a U.S. portfolio.

15) The transaction costs of investing directly in foreign-currency-denominated assets can be reduced by purchasing American Depositary Shares (ADSs). 16) Diversifiable risk is also called systematic risk. 17) Standard deviation is a measure that indicates how the price of an individual security responds to market forces. 18) Market return is estimated from the average return on a large sample of stocks such as those in the Standard & Poor's 500 Stock Composite Index. 19) Betas for actively traded stocks are readily available from online sources. 20) A negative beta means that on average a stock moves in the opposite direction of the market. 21) A beta of 0.5 means that a stock is half as risky the overall market. 22) The index used to represent market returns is always assigned a beta of 1.0. 23) The betas of most stocks are constant over time. 24) A stock with a beta of 1.3 is less risky than a stock with a beta of 0.42. 25) For stocks with positive betas, higher risk stocks will have higher beta values. 26) Adding stocks with higher standard deviations to a portfolio will necessarily increase the portfolio's risk. 27) Beta measures diversifiable risk while standard deviation measures systematic risk. 28) By design, half of all stocks betas are positive betas and half are negative. 29) The basic theory linking portfolio risk and return is the Capital Asset Pricing Model.

30) The CAPM estimates the required rate of return on a stock held as part of a well-diversified portfolio. 31) In the Capital Asset Pricing Model, beta measures a stock's sensitivity to overall market returns. 32) According to the CAPM, the required rate of a return on a stock can be estimated using only beta and the risk-free rate.

Part 2: Multiple Choice Questions 1) Melissa owns the following portfolio of stocks. What is the return on her portfolio? Stock Amount Invested Return on Stock A $8,000 17.5% B $4,000 11% C $12,000 4.3% A) 8.0% B) 9.0% C) 9.8% D) 10.9% 2) Marco owns the following portfolio of stocks. What is the expected return on his portfolio? Stock Amount Invested Return on Stock L $3,400 -6% M $10,000 7.5% N $2,600 12.6% A) 5.5% B) 6.6% C) 4.7% D) 8.0%

3) A portfolio consisting of four stocks is expected to produce returns of -9%, 11%, 13% and 17%, respectively, over the next four years. What is the standard deviation of these expected returns? A) 10.05% B) 11.60% C) 8.00% D) 33.42% 4) The stock of a technology company has an expected return of 15% and a standard deviation of 20%. The stock of a pharmaceutical company has an expected return of 13% and a standard deviation of 18%. A portfolio consisting of 50% invested in each stock will have an expected return of 14 % and a standard deviation A) less than the average of 20% and 18%. B) The average of 20% and 18%. C) greater than the average of 20% and 18%. D) The answer cannot be determined with the information given. 5) If there is no relationship between the rates of return of two assets over time, these assets are: A) Positively correlated. B) Negatively correlated. C) Perfectly negatively correlated. D) Uncorrelated. 6) Combining uncorrelated assets will: A) Increase the overall risk level of a portfolio. B) Decrease the overall risk level of a portfolio. C) Not change the overall risk level of a portfolio. D) Cause the other assets in the portfolio to become positively related. 7) Two assets have a coefficient of correlation of -0.4. A) Combining these assets will increase risk. B) Combining these assets will have no effect on risk. C) Combining these assets may either raise or lower risk. D) Combining these assets will reduce risk.

8) In the real world, most of the assets available to investors A) Tend to be somewhat positively correlated. B) Tend to be somewhat negatively correlated. C) Tend to be uncorrelated. D) Tend to be either perfectly positively or perfectly negatively correlated 9) The risk of a portfolio consisting of two uncorrelated assets will be A) Equal to zero. B) greater than the risk of the least risky asset but less than the risk level of the more risky asset. C) Greater than zero but less than the risk of the more risky asset. D) Equal to the average of the risk level of the two assets. 10) The returns on the stock of DEF and ABC companies over a 4-year period are shown below: Year DEF GHI 1 8% 11% 2 12% 9% 3 -5% -9% 4 6% 13% From this limited data you should conclude that returns on A) DEF and GHI are negatively correlated. B) DEF and GHI are somewhat positively correlated. C) DEF and GHI are perfectly positively correlated. D) DEF and GHI are uncorrelated. 11) Which one of the following will provide the greatest international diversification? A) Directly purchasing a foreign stock B) Purchasing stock of a U.S. multinational firm C) Purchasing an ADS D) Purchasing shares of an international mutual fund

12) Which of the following represent unsystematic risks? I. the president of a company suddenly resigns II. The economy goes into a recessionary period III. A company's product is recalled for defects IV. Federal Reserve unexpectedly changes interest rates A) I, II and IV only B) II and IV only C) I and III only D) I, II and III only 13) Which of the following represent systematic risks? I. the president of a company suddenly resigns II. The economy goes into a recessionary period III. A company's product is recalled for defects IV. Federal Reserve unexpectedly changes interest rates A) I, II and IV only B) II and IV only C) I and III only D) I, II and III only 14) Which one of the following conditions can be effectively eliminated through portfolio diversification? A) a general price increase nationwide B) An interest rate reduction by the Federal Reserve C) Increased government regulation of auto emissions D) Change in the political party that controls Congress 15) Which one of the following types of risk cannot be effectively eliminated through portfolio diversification? A) Inflation risk B) Labor problems C) Materials shortages D) Product recalls

16) Which one of the following conditions can be effectively eliminated through portfolio diversification? A) A general price increase nationwide B) An interest rate reduction by the Federal Reserve C) Increased government regulation of auto emissions D) Change in the political party that controls Congress 17) Systematic risks A) Can be eliminated by investing in a variety of economic sectors. B) Are forces that affect all investment categories. C) Result from random firm-specific events. D) Are unique to certain types of investment. 18) A measure of systematic risk is: A) Standard deviation. B) Correlation coefficient. C) Beta. D) Variance. 19) Beta can be defined as the slope of the line that explains the relationship between A) The return on a security and the return on the market. B) The returns on a security and various points in time. C) The return on stocks and the returns on bonds. D) The risk free rate of return versus the market rate of return. 20) Systematic risks A) Can be eliminated by investing in a variety of economic sectors. B) Are forces that affect all investment categories. C) Result from random firm-specific events. D) Are unique to certain types of investment. 21) In designing a portfolio, relevant risk is A) Total risk. B) Unsystematic risk. C) Event risk. D) Non-diversifiable risk.

22) Which of the following best describes the relationship between a stock's beta and the standard deviation of the stock's returns? A) The higher the standard deviation, the higher the beta. B) The higher the standard deviation, the lower the beta. C) The relationship depends on the correlation between the stock's returns and the market's returns. D) Standard deviation and beta are different ways of measuring the same thing. 23) A stock's beta value is a measure of A) Interest rate risk. B) Total risk. C) Systematic risk. D) Diversifiable risk. 24) The beta of the market is A) -1.0. B) 0.0. C) 1.0. D) Undefined. 25) When the stock market has bottomed out and is beginning to recover, the best portfolio to own is the one with a beta of: A) 0.0. B) +0.5. C) +1.5. D) +2.0. 26) The best stock to own when the stock market is at a peak and is expected to decline in value is one with a beta of A) +1.5. B) +1.0. C) -1.0. D) -0.5.

27) Stock of Gould and Silber Inc. has a beta of -1. If the market declines by 10%, Gould and Silber would be expected to A) Decline by 10%. B) Rise by 10%. C) Not respond to market fluctuations. D) Decline by 1%. 28) Beta is the slope of the best fit line for the points with coordinates representing the ________ and the ________ for each one of several years. A) rate of return; level of risk for an individual security B) Rate of inflation; rate of return for an individual security C) Risk level of a stock; market rate of return D) Market rate of return; security's rate of return 29) The stock of ABC, Inc. has a beta of .80. The market rate of return is expected to increase by 5%. Beta predicts that ABC stock should: A) Increase in value by 6.25%. B) Increase in value by 4.0%. C) Decrease in value by 1.0%. D) Increase in value by .8%. 30) The market rate of return increased by 8% while the rate of return on XYZ stock increased by 4%. The beta of XYZ stock is A) -2.0. B) -0.40. C) 0.50. D) 2.0. 31) Which of the following statements concerning beta are correct? I. Stock with high standard deviations of returns will always high betas. II. The higher the beta, the higher the expected return. III. A beta can be positive, negative, or equal to zero. IV. A beta of .35 indicates a lower rate of risk than a beta of -0.50. A) II and III only B) I and IV only C) II, III and IV only D) I, II, III and IV

32) You have gathered the following information concerning a particular investment and conditions in the market. Risk-free rate 2.5% Market Return 11% Beta of Investment 1.35 According to the Capital Asset Pricing Model, the required return for this investment is A) 8.85%. B) 11.48%. C) 13.98%. D) 14.85%. 33) OKAY stock has a beta of 0.8. The market as a whole is expected to decline by 12% thereby causing OKAY stock to: A) Decline by 9.6%. B) Decline by 12.5%. C) Increase by 9.6%. D) Increase by 12%. 34) The Capital Asset Pricing Model (CAPM) is a mathematical model that depicts the A) Positive relationship between risk and return. B) Standard deviation between a risk premium and an investment's expected return. C) Exact price that an investor should be willing to pay for any given investment. D) Difference between a risk-free return and the expected rate of inflation. 35) When the Capital Asset Pricing Model is depicted graphically, the result is the A) Standard deviation line. B) Coefficient of variation line. C) Security market line. D) alpha-beta line.

36) Which of the following factors comprise the CAPM? I. dividend yield II. risk-free rate of return III. The expected rate of return on the market IV. Risk premium for the firm A) I and III only B) II and IV only C) III and IV only D) II, III and IV only 37) The Franko Company has a beta of 1.90. By what percent will the required rate of return on the stock of Franko Company increase if the expected market rate of return rises by 3%? A) 1.91% B) 2.75% C) 3.27% D) 5.70% 38) What is the expected return on a stock with a beta of 1.09, a market risk premium of 8%, and a risk-free rate of 4%? A) 4.36% B) 8.36% C) 8.72% D) 12.72% 39) According to MSN money, the stock of Orange Corporation has a beta of 1.5, but according to Yahoo Finance it is 1.75. The expected rate of return on the market is 12% and the risk free rate is 2%. What is the difference between the required rates of return calculated using each of these betas? A) 1.50% B) 1.75% C) 2.0% D) 2.5%

41) Small company stocks are yielding 10.7% while the U.S. Treasury bill has a 1.3% yield and a bank savings account is yielding 0.8%. What is the risk premium on small company stocks? A) 10.7% B) 9.4% C) 12.0% D) 9.9% 42) Which of the following statements about the Security Market Line are correct? I. The intercept point is the risk-free rate of return. II. The slope of the line is beta. III. An investor should accept any return located above the SML line. IV. A beta of 1.0 indicates the risk-free rate of return. A) I and II only B) III and IV only C) II, III and IV only D) I, II and III only...