Security Analysis and Investment Management | Set 3
1. _________ above which it is difficult for the market to rise.
Correct : B. A resistance level is a value
2. _________ below which it is difficult for the market to fall.
Correct : C. A support level is a value
3. On November 22, 2009 the stock price of WalMart was $39.50 and the retailer stock index was 600.30. On November 25, 2009 the stock price of WalMart was $40.25 and the retailer stock index was 605.20. Consider the ratio of WalMart to the retailer index on November 22 and November 25. WalMart is _______ the retail industry and technical analysts who follow relative strength would advise _______ the stock.
Correct : B. outperforming, selling
4. Studies of stock price reactions to news are called
Correct : B. event studies.
5. In the Treynor-Black model
Correct : A. Portfolio weight are sensitive to large alpha values which can lead to infeasible long or short position for many portfolio managers.
6. Benchmark portfolio risk is defined as
Correct : C. the variance of the return difference between the portfolio and the benchmark
7. ____________ can be used to measure forecast quality and guide in the proper adjustment of forecasts.
Correct : A. Regression analysis
8. Even low-quality forecasts have proven to be valuable because R-squares of only ____________ in regressions of analysts' forecasts can be used to substantially improve portfolio performance.
Correct : D. 0.001
9. The ____________ model allows the private views of the portfolio manager to be incorporated with market data in the optimization procedure.
Correct : A. Black-Litterman
10. The Black-Litterman model and Treynor-Black model are
Correct : B. complementary tools that should be used in portfolio management.
11. Alpha forecasts must be ____________ to account for less-than-perfect forecasting quality. When alpha forecasts are ____________ to account for forecast imprecision, the resulting portfolio position becomes ____________.
Correct : B. shrunk, shrunk, far more moderate
12. Tracking error is defined as
Correct : A. the difference between the returns on the overall risky portfolio versus the benchmark return.
13. The tracking error of an optimized portfolio can be expressed in terms of the ____________ of
the portfolio and thus reveal ____________.
Correct : D. beta; benchmark risk
14. If a portfolio manager consistently obtains a high Sharpe measure, the manager's forecasting ability __________.
Correct : A. is above average
15. Active portfolio management consists of __________.
Correct : D. Aand B
16. The critical variable in the determination of the success of the active portfolio is ________.
Correct : B. alpha/nonsystematic risk
17. Active portfolio managers try to construct a risky portfolio with __________.
Correct : A. a higher Sharpe measure than a passive strategy
18. The beta of an active portfolio is 1.20. The standard deviation of the returns on the market index is 20%. The nonsystematic variance of the active portfolio is 1%. The standard deviation of the returns on the active portfolio is __________.
Correct : D. 26.0%
19. A purely passive strategy is defined as
Correct : D. both A and B.
20. According to the index model, covariances among security pairs are
Correct : D. A and c
21. The intercept calculated by Merrill Lynch in the regression equations is equal to
Correct : C. α + rf (1 - β)
22. Analysts may use regression analysis to estimate the index model for a stock. When doing so,
the slope of the regression line is an estimate of ______________.
Correct : B. the β of the asset
23. In a factor model, the return on a stock in a particular period will be related to _________.
Correct : D. both A and B
24. Merrill Lynch estimates the index model for a stock using regression analysis involving total returns. They estimated the intercept in the regression equation at 6% and the β at 0.5. The risk-free rate of return is 12%. The true β of the stock is ________.
Correct : A. 0%
25. Depending upon the investor’s preferences and the market opportunities an investor’s portfolio is the portfolio that
I. Maximizes her expected utility. II. Maximizes her risk. III. Minimizes both her risk and return. IV. Maximizes her expected profit.
Correct : A. Only (I) above
26. Particulars Falcon International Triumph International Average Return (%) 10 8 Average Volatility (%) 12 15 For the portfolio to yield lower risk than the individual stocks, the correlation coefficient of stocks should be
Correct : C. Less than 0.80
27. An Investor can form a portfolio that lies to the right of the optimal risky portfolio on asset allocation line by
I. Lend some money at the risk free rate and invest the remainder in the optimal risky portfolio. II. Borrow some money at the risk free rate and invest in the optimal risky portfolio III. Such a portfolio cannot be formed IV. Invest only in risky assets
Correct : B. Only (II) above
28. Analysis carried out on the performance of a fund for last year is compiled as under:
Total selectivity 2.50% Net selectivity 1.53% of portfolio 0.90 Return on market index 13.00% Standard deviation of market returns 13.50% Risk free return, Rf 8.00% The total risk ( i) of portfolio is
Correct : D. 14.8%
29. Mr. Zaffar has following scrips in his portfolio: Scrip Beta Proportion of investment (%) Reliance .83 .25 Infosys .8 .25 Reymond 1.4 .35 IndiaBulls 1.2 .15 If the risk free rate is 6% and return on the market is 16%, what will be the expected return on his portfolio?
Correct : D. 16.80%
30. Which of the following is/are disadvantage(s) of indexing of bond portfolio? I. Advisory fee schedule is high II. In past, returns earned by most active fund managers has much exceeded those of index portfolio III. Loss of opportunity for incremental returns.
Correct : C. Only (III) above
31. Which of the following statements regarding portfolio revisions is/are incorrect?
Correct : D. Variable ratio plan stock portfolio becomes more aggressive when stock prices rise and vice versa.
32. The alpha of an active portfolio is 1%. The expected return on the market index is 16%. The variance of the return on the market portfolio is 4%. The nonsystematic variance of the active portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is 1.05. The optimal proportion to invest in the active portfolio is __________.
Correct : C. 51.3%
33. A portfolio comprises of two stocks A and B. Stock A gives a return of 8%and stock B gives a return of 7%. Stock A has a weight of 60% in the portfolio. What is the portfolio return?
Correct : B. 11%
34. Price movement between two Steel company stocks would generally have a ______ co- variance
Correct : A. Positive
35. The CAPM is founded on the following two assumptions (1) in the equilibrium every mean variance investor holds the same market portfolio and (2) the only risk the investor faces is the beta
Correct : A. True
36. . If a Portfolio manager consistently obtains a high Sharpe’s measure, the portfolio manager has exhibited
Correct : D. Both (a) and (b) above.
37. The critical variable in the determination of the success of the active portfolio is
Correct : A. Jensen’s Alpha / Non-Systematic Risk
38. Ms. Kiran wrote a European call option on a stock. The premium was Rs.5 per share and the market price and exercise price of the share were Rs.39 and Rs.45 respectively. If on expiry date, the price of the share was Rs. 42, the profit/loss to Ms. Kiran was
Correct : D. Rs.4
39. Other things being same, the price of American call option on a stock is positively correlated with the following factors, except
Correct : A. The exercise price
40. What is a call?
Correct : B. An option to buy stock at a specified price
41. The intrinsic value of an out-of-the-money call option is
Correct : D. Zero
42. The commitment of current funds in anticipation of receiving a larger future flow of funds is
called
Correct : C. An investment
43. A(n) _____ is a legally documented claim on an asset, while a _____ is an actual, tangible asset which may be seen, felt, held, or collected.
Correct : B. Financial asset; real asset
44. When ranking security returns, the data shows that the annualized returns are as follows, ranked from highest return to lowest return.
Correct : B. Small stocks, large stocks, long-term corporate bonds, long-term government bonds, treasury bills
45. When ranking the riskiness of securities using the standard deviation, the highest risk security to the lowest risk security is as follows:
Correct : A. Small stocks, large stocks, long-term government bonds, U.S. treasury bills
46. Which of the following statements is the most accurate concerning security returns over The eight decades since the 1920's?
Correct : D. All securities exhibited very unstable returns over the eight decades in question.
47. A direct equity claim arises through investment in
Correct : B. Common stocks, warrants and options
48. Investment in a mutual fund results in
Correct : A. An indirect equity claim
49. What factors must be considered in choosing between investment alternatives?
Correct : D. Safety of principle
50. Which of the following examples involves objective probabilities?
Correct : B. Coin-flipping experiment.
51. The expected return is determined by:
Correct : D. both a and b.
52. If the future were known with certainty, which of the following statements would be wrong?
Correct : D. The variance is greater than zero.
53. Which of the following statements about arbitrage is correct?
Correct : A. A risk averter will arbitrage because profits can be made with no risk and no investment.
54. Which of the following statements about the mean-variance criterion is correct?
Correct : C. Investors select assets that provide the lowest variance for the same or higher expected return.
55. Which of the following is not a characteristic of a risk averter?
Correct : B. A risk averter will be ready to pay a higher price for an asset whose variance increases.
56. Which of the following statements is incorrect?
Correct : A. The variance is the square root of the standard deviation.
57. Arbitrage trading strategy implies that:
Correct : C. profits are made with no risk and no investment.
58. Which of the following is a measure of the dispersion of returns around the mean?
Correct : A. Variance.
59. Investors who completely ignore an asset’s variance and only consider the asset’s expected
return are called:
Correct : C. risk-neutral investors.
60. Underlying all investments is the tradeoff between
Correct : A. Expected return and actual return
61. Which of the following investment areas is heavily tied to work using mathematical and statistical models?
Correct : A. Security analysis
62. This type of risk is avoidable through proper diversification.
Correct : C. unsystematic risk
63. Liquidity risk
Correct : D. The risk increases whenever interest rates increase
64. If interest rates are expected to rise, you would expect
Correct : A. Bond prices to fall more than stock prices
65. The one-period rate of return from a stock or bond which may or may not be realized can
be described by using the term
Correct : A. Holding-period return.
66. If the dispersion around a security's return is larger
Correct : A. The expected return is smaller
67. Who popularized the dividend discount model, which is sometimes referred to by his name?
Correct : A. Myron Gordon
68. A group of mutual funds with a common management are known as:
Correct : C. Fund families.
69. Markowitz's main contribution to portfolio theory is
Correct : B. That risk is a function of credit, liquidity and market Factors
70. Information about return on an investment is as follows: (a) Risk free rate 10% (b) Market Return is 15% (c) Beta is 1.2 What would be the return from this investment?
Correct : C. 16%
71. If the current market price is considered as a basis of CAPM, then what would happen if Actual Market Price < CAPM,
Correct : A. stock is undervalued
72. What should be the investment decision When CAPM < Expected Return ?
Correct : B. Buy
73. If the Required rate of Return as per CAPM is 18% and expected return is 12%, what should be the investment decision?
Correct : C. Sell
74. Which amongst the following is not included in the Phases of Portfolio Management?
Correct : B. Capital Market theory
75. Technical analyst concentrates more on price movements and ignores the fundamentals of the shares:
Correct : A. True
76. Fundamental analysis, does not concentrate on the fundamental factors affecting the company such as
Correct : C. Price Charts and Patterns
77. The fundamental analyst compares this intrinsic value (true worth of a security based on its fundamentals) with the
Correct : C. Current market price.
78. Sharpe ratio and Treynor ratio measures which of the following:
Correct : B. Risk adjusted returns
79. The return expected = ……….+ Beta portfolio (Return of Market - Risk Free Return)
Correct : C. Risk Free Return
80. Alpha = Return of Portfolio- ………..?
Correct : B. Expected Return
81. The realized return
Correct : A. is what an investor actually obtains from his investment at the end of the investment period.
82. Possible variation of the actual return from the expected return is termed as ?
Correct : B. Risk
83. Market risk is also called:
Correct : B. nondiversifiable risk and systematic risk.
84. Suppose you estimate the characteristic line for Stock X. You find that the standard deviation of X’s error term is 7%, X’s beta is 1.4, and the standard deviation of the market is 12%. What is the total standard deviation for Stock X?
Correct : A. 18.2%
85. The risk-free rate for the next year is 3%, and the market risk premium is expected to be 10%. The beta of Acme’s stock is 1.5. If you believe that Acme’s stock will actually return 18.2% over the next year, then according to the CAPM you should:
Correct : B. buy the stock because it is under priced.
86. Stock A has a beta of 1.0 and very high unique risk. If the expected return on the market is 20%, then according to the CAPM the expected return on Stock A will be:
Correct : C. exactly 20%.
87. The beta of the market portfolio is:
Correct : D. 1.0
88. If an asset’s expected return plots above the security market line, the asset is:
Correct : B. under priced.
89. Which one of the following is true?
Correct : D. Alpha is the slope of the opportunity line.
90. The market risk premium is 15% and the risk-free rate is 5%. The beta of Asset D is 0.2. What is Asset D’s expected return under the CAPM?
Correct : A. 8%
91. The market risk premium is the slope of:
Correct : C. the security market line.
92. According to the CAPM, overpriced securities have:
Correct : C. negative alphas.
93. The beta of the risk-free asset is:
Correct : B. 0
94. Capital asset pricing theory asserts that portfolio returns are best explained by:
Correct : B. systematic risk.
95. The market portfolio has a beta of:
Correct : C. 1.0
96. According to security market line, the expected return of any security is a function of:
Correct : C. systematic risk.
97. According to the capital market line, the expected return of any efficient portfolio is a
function of:
Correct : D. total risk.
98. Which one of the following is the exponential factor for a 100-day Exponential Moving Average?
Correct : C. 0.02
99. Which of the following patterns is the most reliable and widely used for indicating trend reversal?
Correct : D. Head and Shoulders
100. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is