1.

An analyst gathers the following information for the asset allocations of

three portfolios:
Portfolio Fixed Income Equity Alternative Assets
(%) (%) (%)
1 30 45 25
2 45 30 25
3 15 55 30
Which of the portfolios is most likely appropriate for a client who has a high
degree of risk tolerance? A. Portfolio 1. B. Portfolio 2. C. Portfolio 3.
D. Neither of them

1. An investor's transactions in a mutual fund and the fund's return over a three
year period are given below:
Year 1 Year 2 Year 3
New investment at the beginning of the $2,000 $3,000
year $2,200
Investment return for the year -10% 25% 40%
Withdrawal by investor at the end of the
year $0 $1,000 $0
Based on the data, the money weighted return for the investor is
closest to: A. 24.7%. B. 35.2%
C.
51.8%.
D.
74.9%.

2. An analyst observes that the historic geometric returns are 10% for fixed
income securities, 5% for treasury bills and 2% for inflation. The real rate of
return for fixed income securities is closest to:
A. 4.7%. B. 7.2%. C. 7.8%. D.
8.6%.

3. An analyst obtains the following annual rates of return for a mutual fund:
 Year 2011 2013
2012
Return -14 -1.5
(%) 23%
The fund’s holding period return over the three-year period is closest to:
A. 4.19%. B. 4.75%.
C.
5.29%.
D.
5.75%.

4. Ahmed invested in a fund which offered the following returns over the last
three years:
Assets under management at Net
Year Return
start of year (%)
1. 15 million 15
2. 20 million -5
3. 5 million 10
The money-weighted annual return is closest to:
A. 4.5%. B. 5.0%.
C.
12.1%.
D.
15.2%.

5. You are evaluating the performance of two investment managers in your

team:
• Soomro: In the last 200 days, he has earned a holding period return of 9.2
percent.
• Seemi: Over the past 5 months, her holding period return is 6.0%.
Which manager performed better?
 a. Soomro
b. Seemi
c. Both did equally well.
d. None.

6. Saman purchases two shares of Sun Co, one for $32 at time t = 0 and the
other for $45 at t = 1. At t = 2, he sells them both for $53 each. The stock
paid a dividend of $0.75 per share at t = 1 and at t = 2. The periodic money
weighted rate of return on the investment is closest to:
A. 23.82%. B. 25.76%. C.
26.75%. D. 29.13%.

7. Fred David invested in the stock of a hypothetical company called Stars

Ltd. He purchased three shares worth $100 each at the beginning of the
first year. He invested in another share worth $115 before the beginning
of the second year. He sold the four shares at the end of the second year
for a price of $120 per share. At the end of each period, the stock paid a
dividend of $2 per share.
Which of the following is most likely to be the money-weighted rate of
return?

A. 8.76%. B. 9.62%.
C. 10.01%
D. 10.66%.

8. The following table presents historical information for two stocks, ABC
and XYZ:
Variance of returns for ABC 0.0308
Variance of returns for XYZ 0.0705
Correlation coefficient between ABC and
XYZ 0.6500
 The covariance between ABC and XYZ is closest to:
A. 0.0014. B. 0.0303.
C. 0.0550
D. 0.0717.

9. Ahmed’s portfolio consists of two stocks: Ivne. Ltd and Iris. Co. The
standard deviation of returns is 0.25 for Ivne. Ltd and 0.14 for Iris. Co.
The covariance between the returns of the two stocks is 0.0045. The
correlation of returns between them is:
A. 0.008. B. 0.129.
C. 7.778.
D. 8.123

10. You are a U.S investor with 78% invested in the S&P 500 and 22%
invested in the Dow Jo nes 30 index. The risk and expected return data is
given below:
Risk Expected Return Covariance (%
(%) (%) squared)
S&P 500 16.32% 9.82
0.43
Dow 14.97
Jones 30 32.86%
The portfolio’s expected return and risk are closest to:
A. 10.95% and 15.14%. B. 10.90% and 15.10%. C.
11.58% and 15.10%.
D. 11.95% and 15.14%.

11. The correlation between the historical returns of Stock A and Stock B is
0.75. If the variance of Stock A is 0.25 and the variance of Stock B is 0.36,
the covariance of the returns of Stock A and Stock B is closest to:
 A. 0.25. B. 0.30.
C.0.36. D. 0.42.

12. Selected information about shares of two companies is provided below:

ABC XYZ
Corporation Corporation
Standard deviation 25% 30%
Correlation of
returns 0.24
Portfolio weights 40% 60%
The standard deviation of returns of the portfolio formed with these two
stocks is closest to:
A. 0.0043. B. 0.0756.
C. 0.2259.
D. 0.3462

13. An analyst studies an investment portfolio with stocks of Company ABC

and Company JKL. He wishes to compute the correlation of returns
between the stocks. However, the only bits of information available
include the following data.
Stock Standard Deviation Portfolio Weights
ABC 36% 40%
JKL 27% 60%
The standard deviation of the returns for the portfolio is 30%.
The correlation coefficient for the returns is
closest to: A. 0.92. B. 1.02. C. 1.84. D.
2.92.

14. The following data is available:

Expected Standard Risk aversion
Return Deviation coefficient
 15% 27% 4
The utility of this investment is closest to:
A. 0.0040.
B. 0.0041.
C. 0.0042.
D. 0.0044.

15. Arman is considering investing in a small-cap stock fund and a general

bond fund. The correlation between the two fund returns is 0.12. Expected
annual return equaled 16% and 6% respectively with standard deviation
of 30% for small-cap stock and 11.5% for general bond fund. If Arman
requires a portfolio return of 10 percent, the proportions in each fund
respectively should be closest to:
A. 30% and 70%.
B. 36.4% and 63.4%.
C. 40% and 60%. D. 42.3% and 56%

16. Information about a portfolio that consist of two assets is provided below:
Asset Portfolio Weight Standard deviation
ABC 30% 10%
JKL 70% 8%
If the correlation coefficient between the two assets is 0.8, the standard
deviation of the portfolio is closest to: A. 8.2%. B. 8.5%. C. 9.1%.
D. 9.8%.

17. Assume that two securities that are present in equal proportions in an
investor’s portfolio have the same expected returns and volatility. For
which of the following correlations between the two securities would the
investor most likely be able to achieve the greatest diversification benefit?
A. +0.86.
B. -0.86.
C. 0.00.
D. 0.91.
 18. A correlation matrix of the returns for securities A, B, and C is reported
below:

Security A B C
A 1.0
B -
1.0 1.0
C 0.5 - 1.0
0.5

Assuming that the expected return and the standard deviation of each security
are the same, a portfolio consisting of an equal allocation of which two securities
will be most effective for portfolio diversification? Securities:
A. A and B.
B. A and C.
C. B and C.
D. None of the above

19. Ali reviews the status of his home mortgage schedule for the month of
December 2013:
Date Item Balance (GBP)

01 December Outstanding mortgage loan balance 700,000

31 December Total monthly required payment 15,000

31 December Interest component of total monthly required payment 3,000

On 31 December 2013, Ali makes a payment of GBP 20,000 rather than GBP
15,000. What will be outstanding mortgage loan balance immediately after the
payment is made? A. GBP 680,000.
a. GBP 683,000. C. GBP 688,000.
D. GBP 690,000.
 20. Taha is an analyst for Adamjee Insurance that invests in residential
mortgage pass-through securities. Taha reviews the monthly cash flow of
one underlying mortgage pool to determine the cash flow to be passed
through to investors:
Total principal paid including prepayment $2,445,000

Scheduled principal to be paid before prepayment $445,000

Gross coupon interest paid $3,555,000

Servicing fees $145,000

Other fees for guaranteeing the issue $55,000

Based on Taha’s table, the total cash flow to be passed through to the investors
is closest to:
A. $5,800,000. B. $5,855,000.
C. $6,000,000.
D. $6,855,000.

21. Charles Dent obtains a non-recourse loan for $200,000. A year later the
principal on the loan is $180,000 and Charles defaults on the loan. The
lender forecloses and sells the house for $150,000. What amount is the
lender entitled to claim from Charles? A. $0. B. $30,000. C. $50,000.
E. $60,000

22. If the CPR is 10%, then the SMM is closest to: A.

0.79%. B. 0.87%. C. 0.96%.
D. 0.99%.

23. The principal balance of a pool is $10 million and $100,000 is

scheduled to be repaid in a given month. The SMM is 0.93%. The forecasted
prepayment amount for the month is closest to: A. $930. B. $92,070.
 C. $93,000.
D. $94,000.
24. Suppose there are three mortgages with respective balances of
$100,000, $200,000, and $300,000. The mortgage rates are 6%, 7%, and 8%
respectively. The WAC is closest to: A. 6.33 B. 7.33. C. 8.33.
D.9.33.
25. Consider a CMO structure with one planned amortization class and one
support tranche. The initial PAC collar was 100-250 PSA. If the actual
prepayment speed is 50 PSA, the average life of the PAC tranche will: A.
contract. B. extend.
C. remain the same.
D. none of the above.
26. Consider a CMO with three sequential pay tranches A, B, C, and D.
The average lives for the tranches are 4.6, 10.3, 12.1 and 15.0 years
respectively under a
150 PSA assumption. An investor concerned about extension risk
is most likely to invest in: A. tranche A. B. tranche B. C. tranche C.
D. tranche D.

27. Consider a CMO structure with one planned amortization class and one
support tranche. The initial PAC collar was 150-250 PSA. If the actual
prepayment speed is 100 PSA, the average life of the PAC tranche will: A.
contract. B. extend.
C. remain the same.
D. none of the above.

28. The current Euro/Dollar rate is €1 = $2. XYZ Ltd-a company that
operates in the Eurozone, makes a sale of $2,000 to a customer in the United
States of America. However, by the time the customer pays, the Euro has
strengthened by 20%
What will be Euro receipt of XYZ Ltd?
A. €1,200.00
B. €1,000.53
C. €833.33
D. €673.66