Investment and Portoflio MGT Questions

Investment and Portfolio Management

1. Assume that the nominal return on U.S. government T-bills was

10% during 20X2, when the rate of inflation was 6%. The real risk-
free rate of return on these T-bills was:
A. 10%
B. 6%
C. 3.77%
D. 0%

2. The relationship between risk and return is such that:
A. investors increase their required rates of return as

perceived risk increases
B. investors decrease their required rates of return as
perceived risk increases
C. investors increase their required rates of return as
perceived risk decreases
D. investors decrease their required rates of return as
perceived risk decreases
3. If a firm increases its financial risk by selling a large bond issue

that increases its financial leverage:
A. investors will perceive its common stock as less risky

and the stock will move up the SML
B. investors will perceive its common stock as riskier and the
stock will move down the SML
C. investors will perceive its common stock as riskier and the
stock will move up the SML
D. investors will perceive its common stock as less risky
and the stock will move down the SML
4. When individuals believe they have sufficient income and assets
to cover their expenses while maintaining a reserve for
uncertainties, they are most likely in the phase of
the investment life cycle.
A. Gifting
B.
consolidation
C.
accumulation
D.
spending
5. When setting investor objectives in the investment policy

statement, expressing goals only in terms of returns can:
A. lead to inappropriate investment practices by the

portfolio manager, such as the use of low-risk investment
strategies
B. distort the expected outcome
C. lead to inappropriate investment practices by the
portfolio manager, such as the use of high-risk investment
strategies
D. lead to a misleading outcome
6. Asset allocation is important in determining overall

investment performance because it:
A. helps determine the expected return of the

portfolio
B. determines most of the portfolio’s returns over
time
C. helps determine the standard deviation of the
portfolio
D. helps determine the covariance of the
portfolio
7. Which statement is FALSE regarding the trading of securities and
bonds in the U.S. and other markets?
I. Prior to 1970, the securities traded in the U.S. stock and

bond markets comprised about 65% of all the securities
available in world capital markets
II. By 1998, U.S. bonds and equities accounted for 42.3% of the
total securities market versus 47.3% for nondollar bonds and
stocks
III. If you consider only the stock and bond market, the
U.S. proportion of this combined market is 47% in 1998
A. I
only B.
II only
C. III
only
D. None of the
above
8. An analysis of domestic returns for the U.S. bond markets ranks

fourth out of six countries. When the impact of exchange rates is
considered, the U.S. is the lowest out of six. This means that the:
A. exchange rate effect for a U.S. investor who invested in

foreign bonds was always negative (i.e. the U.S. dollar was
weak)
B. exchange rate effect for a U.S. investor who invested in
foreign bonds was always positive (i.e. the U.S. dollar was
strong)
C. exchange rate effect for a U.S. investor who invested in
foreign
bonds was always positive (i.e. the U.S. dollar was weak)
D. exchange rate effect for a U.S. investor who invested in
foreign bonds was always negative (i.e. the U.S. dollar was
strong)
9. Adding a security that has a low correlation to an existing
portfolio will: A. lower the overall variability of the portfolio

B. increase the overall variability of the
portfolio
C. make the portfolio more
risky
D. ensure the portfolio achieves a good rate of
return
10. Consider the following information:
The possible rate of return for a portfolio for an investment is
shown below.
Probability Possible rate of return

0.25 0.09
0.25 0.11
0.25 0.13
0.25 0.16
The expected rate of return for the investment is as follows:
A. 12.25%
B. 2.25%
C. 4%
D. 3.25%
11. Consider the information below relating to the monthly rates of

return for two companies X and Y over a period of 4 months:
X Y
Rate of return % Rate of Return %
Date
Month 1 -4.76 -4.75
Month 2 5.34 7.65
Month 3 12.09 6.98
Month 4 -2.98 9.65
The covariance per month between the two companies is equal to:
A. 17.95
B. 2.42
C. 4.88
D. 71.78
12. Consider the following information relating to two
assets: E (R1) = 0.3

E (R2) = 0.3
E (θ 1) = 0.2
E ( θ 2) = 0.2
The weights of each asset in the
portfolio are: W1 = 0.5

W2 = 0.5
The correlation coefficient is r1, 2 = 1.00

The covariance of the portfolio is equal to:
A. 0.2
B. 1.0
C. 0.06
D. 0.04
13. The market portfolio is:
A. a completely diversified portfolio, which means that most

of the risk unique to individual assets in the portfolio is
diversified away
B. a portfolio in which both systematic and unsystematic risk
has been diversified away
C. the portfolio that all investors invest their funds in
D. a completely diversified portfolio, which means that all
the risk unique to individual assets in the portfolio is
diversified away
14. The existence of a risk-free asset results in the
derivation of: A. the security market line (SML)

B. the
characteristic line
C. the efficient
frontier
D. the capital market line
(CML)
15. The CAPM is an:
A. equilibrium model that predicts the expected return on a

stock given the expected return on the market and
the stock’s correlation coefficient
B. equilibrium model that predicts the expected return on a
stock given the expected return on the market and
the stock’s covariance
C. equilibrium model that predicts the expected return on a
stock given the expected return on the market and the stock’s
beta coefficient
D. equilibrium model that predicts the expected return on a
stock given the expected return on the market and the stock’s
standard deviation

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Investment and Portfolio Management

1. Assume that the nominal return on U.S. government T-bills was

2. The relationship between risk and return is such that:

A. investors increase their required rates of return as

3. If a firm increases its financial risk by selling a large bond issue

A. investors will perceive its common stock as less risky

5. When setting investor objectives in the investment policy

A. lead to inappropriate investment practices by the

6. Asset allocation is important in determining overall

A. helps determine the expected return of the

I. Prior to 1970, the securities traded in the U.S. stock and

8. An analysis of domestic returns for the U.S. bond markets ranks

A. exchange rate effect for a U.S. investor who invested in

9. Adding a security that has a low correlation to an existing

portfolio will: A. lower the overall variability of the portfolio

Probability Possible rate of return

The expected rate of return for the investment is as follows:

11. Consider the information below relating to the monthly rates of

12. Consider the following information relating to two

assets: E (R1) = 0.3

The weights of each asset in the

portfolio are: W1 = 0.5

The correlation coefficient is r1, 2 = 1.00

13. The market portfolio is:

A. a completely diversified portfolio, which means that most

14. The existence of a risk-free asset results in the

derivation of: A. the security market line (SML)

15. The CAPM is an:

A. equilibrium model that predicts the expected return on a

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