SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

1. Which of the following portfolio construction methods starts with asset allocation? A) Top-down B) Bottom-up C) Middle-out D) Buy and hold 2. Which of the following portfolio construction methods starts with security analysis? A) Top-down B) Bottom-up C) Middle-out D) Buy and hold 3. Asset allocation refers to ____________. A) choosing which securities to hold based on their valuation B) investing only in “safe” securities C) the allocation of assets into broad asset classes D) All of the above 4. Financial assets permit all of the following except ____________. A) consumption timing B) allocation of risk C) elimination of risk D) All of the above 5. Money market securities ____________. A) pay a fixed income B) are highly marketable C) generally very low risk D) all of the above 6. Which of the following is not a characteristic of a money market instrument? A) marketability B) long maturity C) liquidity premium D) B and C Use the following to answer questions 7-9: Consider the following three stocks:

7. The price-weighted index constructed with the three stocks is A) 30 B) 40 C) 50 D) 60

The first major step in asset allocation is: A) assessing risk tolerance. David tolerates higher risk than Elias. C) Investment D dominates all of the other investments. D) Investment D dominates only Investment B. A) for the same risk. According to the mean-variance criterion. The value-weighted index constructed with the three stocks using a divisor of 100 is A) 1. David is a less risk-averse investor than Elias. 13. which of the statements below is correct? A) Investment B dominates Investment A. B) Investment B dominates Investment C. C) for the same risk.2 B) 1200 C) 490 D) 4900 9. D) They are willing to accept lower returns and high risk. Therefore. A bond that can be retired prior to maturity by the issuer is a ____________ bond. B) analyzing financial statements. Elias is a risk-averse investor. C) They only accept risky investments that offer risk premiums over the risk-free rate. B) They accept investments that are fair games. B) for the same return. David requires a higher rate of return than Elias.8. 14. Elias requires a lower rate of return than David. 12. Elias tolerates higher risk than David. Assume at these prices the value-weighted index constructed with the three stocks is 490. Which of the following statements regarding risk-averse investors is true? A) They only care about the rate of return. D) for the same return. What would the index be if stock B is split 2 for 1 and stock C 4 for 1? A) 265 B) 430 C) 355 D) 490 10. C) estimating security betas. A) secured B) unsecured C) callable D) Yankee 11. D) identifying market anomalies. .

C) β [E(RM) . According to the Capital Asset Pricing Model (CAPM). As diversification increases. 21.06.12.132 20. B) beta. respectively. B) 0. 22.12. the expected rate of return on any security is equal to A) Rf + β [E(RM)]. An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit. Rosenberg and Guy found that __________ helped to predict a firm's beta. Which statement is not true regarding the Capital Market Line (CML)? A) The CML is the line from the risk-free rate through the market portfolio.144. A) positive B) negative C) zero D) all of the above . A) 0 B) 1 C) the variance of the market portfolio D) infinity 16.15. D) The CML always has a positive slope. C) The CML is also called the security market line. A) the firm's financial characteristics B) the firm's industry group C) firm size D) All of the above 17. D) 0. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is A) unique risk. According to the capital asset pricing model (CAPM). B) The CML is the best attainable capital allocation line.2 is equal to A) 0. The risk-free rate and the expected market rate of return are 0. B) Rf + β [E(RM) . D) E(RM) + Rf. C) 0. the total variance of a portfolio approaches ____________. the expected rate of return on security X with a beta of 1.Rf]. D) reinvestment risk 19.Rf]. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio's rate of return is a function of A) market risk B) unsystematic risk C) unique risk. C) standard deviation of returns. D) variance of returns 18.06 and 0.

and the Federal Reserve is following an easy monetary policy 28. Portfolio B has a beta of 0. A negatively-sloped yield curve suggests that A) short-term rates exceed long-term rates. The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called ___________. A) yields are constant B) coupons are constant C) the spread between yields is constant D) short-term bond prices fluctuate even more . you should take a short position in portfolio __________ and a long position in portfolio _______. A B) A. and the Federal Reserve is following a tight monetary policy D) long-term rates exceed short-term rates. and maturity date D) The coupon rate. The risk-free rate of return is 6%. lasting from several months to years is called _________. and maturity date 29. A) A. B C) B. A) arbitrage B) capital asset pricing C) factoring D) fundamental analysis 24. A) a minor trend B) a primary trend C) an intermediate trend D) trend analysis 26. What does the market price of a bond depend on? A) The coupon rate and terms of the indenture B) The coupon rate and maturity date C) The terms of the indenture.23. A long-term movement of prices. A liquid asset may A) be converted into cash B) be converted into cash with little chance of loss C) not be converted into cash D) not be converted without loss 27. A D) B. terms of the indenture.8 and an expected return of 12%. While bond prices fluctuate. and the Federal Reserve is following an easy monetary policy C) long-term rates exceed short-term rates. B 25. Consider a single factor APT. and the Federal Reserve is following a tight monetary policy B) short-term rates exceed long-term rates. If you wanted to take advantage of an arbitrage opportunity.0 and an expected return of 16%. Portfolio A has a beta of 1.

Which of the following is true of municipal government debt? A) It pays more interest than corporate debt. B) It is often purchased by individuals with high incomes. D) It is not subject to interest rate risk. 32. A) fewer assets are debt-financed. and the ratio of debt-to-equity increases D) more assets are debt-financed. Which of the following is an example of a depreciable asset? A) Land B) Cash C) Accounts receivable D) Equipment 34. What do activity ratios measure? A) How rapidly assets flow through the firm B) How frequently the firm’s stock is traded C) The employee turnover rate D) The profitableness of accounts receivable 37. The use of financial leverage by a firm may be measured by the A) ratio of debt to total assets B) firm’s beta coefficient C) firm’s retention of earnings D) ratio of the price of the firm’s stock price to its earnings 33. C) It is exempt from estate taxation. As the debt ratio increases. and the ratio of debt-to-equity decreases C) more assets are debt-financed. the price of preferred stock A) is not affected B) rises C) falls D) may rise or fall 31. and the ratio of debt-to-equity decreases 35. If interest rates rise.30. What is a call? A) An option to sell stock at a specified price B) An option to buy stock at a specified price C) An option to sell stock on a specified date D) An option to buy stock on a specified date 38. and the ratio of debt-to-equity increases B) fewer assets are debt-financed. Which of the following is on the horizontal axis of the Security Market Line? A) Standard deviation B) Beta C) Expected return D) Required return . The net asset value of a mutual fund investing in stock rises with A) higher stock prices B) lower equity values C) an increased number of shares D) increased liabilities 36.

You own a large orange grove and will be harvesting from November through April. Financial leverage may increase a corporation’s risk because A) operating income may stabilize B) the firm has fixed obligations to meet C) more common stock is outstanding D) dividends must be paid . To hedge against price risks you should A) sell orange juice contracts with a November delivery B) buy orange juice contracts with a November delivery C) sell orange juice contracts with delivery dates between November and April D) buy orange juice contracts with delivery dates between November and April 40.39.

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