Applied Portfolio Management
Study Guide Questions
Course Introduction
Applied Portfolio Management is a course designed to equip students with practical skills and theoretical knowledge necessary for managing investment portfolios in real-world financial markets. The course covers key topics such as asset allocation, security selection, risk assessment, diversification strategies, portfolio performance evaluation, and adherence to ethical and professional standards. Students will engage in hands-on experience through case studies, simulations, and, where possible, the management of actual investment funds. Emphasis is placed on the application of modern portfolio theory, the use of quantitative tools for portfolio analysis, and adapting strategies in response to changing market conditions.
Recommended Textbook
Analysis of Investments and Mangement of Portfolios International 10th Edition by Reilly
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Chapter 1: An Overview of the Investment Process
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Q1) Measures of risk for an investment include
A) Variance of returns and business risk
B) Coefficient of variation of returns and financial risk
C) Business risk and financial risk
D) Variance of returns and coefficient of variation of returns
E) All of the above
Answer: D
Q2) If a significant change is noted in the yield of a T-bill,the change is most likely attributable to
A) A downturn in the economy.
B) A static economy.
C) A change in the expected rate of inflation.
D) A change in the real rate of interest.
E) A change in risk aversion.
Answer: C
Q3) The expected return is the average of all possible returns.
A)True
B)False
Answer: False
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Chapter 2: The Asset Allocation Decision
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Q1) What would the equivalent taxable yield be on an investment that offers a 6 percent tax exempt yield? Assume a marginal tax rate of 28%.
A) 0.125%
B) 7.20%
C) 6.48%
D) 8.33%
E) 32.14%
Answer: D
Q2) Important reasons for constructing a policy statement include:
A) Helps investors decide on realistic investment goals
B) Create a standard by which to judge the performance of the portfolio manager
C) Develop an instrument to judge risk
D) Choices a and b
E) All of the above
Answer: D
Q3) Risk tolerance is exclusively a function of an individual's psychological makeup.
A)True
B)False
Answer: False
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Chapter 3: The Global Market Investment Decision
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Q1) Refer to Exhibit 3.2.What is the large company stock nominal return?
A) 3.56%
B) 5.37%
C) 6.19%
D) 9.16%
E) 11.32%
Answer: D
Q2) What type of mutual fund issues "redeemable securities" meaning that the fund stands ready to buy or sell the shares at their net asset value with a transaction fee?
A) No-load, closed-end fund
B) No-load, open-end fund
C) Load, closed-end fund
D) Load, open-end fund
E) None of the above
Answer: D
Q3) A call option is usually issued in conjunction with convertible bonds.
A)True
B)False
Answer: False
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Chapter 4: Securities Markets: Organization and Operation
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Sample Questions
Q1) Refer to Exhibit 4.7.At the end of one year shares of RossCorp stock are selling for $35 per share and the company paid dividends of $0.85 per share.Assuming that you paid the full cost of the purchase,what is your rate of return if you sell RossCorp stock?
A) -33.05%
B) -23.42%
C) 23.42%
D) 33.05%
E) -25.35%
Q2) Refer to Exhibit 4.8.What is your total dollar return on this investment?
A) $1,000
B) $900
C) $850
D) $670
E) $520
Q3) A continuous market that has price continuity requires depth of buyers and sellers.
A)True B)False
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Chapter 5: Security-Market Indexes
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Q1) Refer to Exhibit 5.1.Compute an unweighted price indicator series,using geometric means.What is the percentage change in the index from Day T to Day T+1? Assume a base index value of 100 on Day T.
A) 5.35%
B) 7.48%
C) 9.93%
D) 6.33%
E) None of the above
Q2) Which of the fundamental factors was <b>not </b>used in the Fundamental Index created by Research Affiliates,Inc.?
A) Sales
B) Profits (cash flow)
C) Leverage (debt/equity)
D) Net assets (book value)
E) Dividends
Q3) Unlike the Dow Jones Industrial Average,the Nikkei-Dow Jones Average is price weighted.
A)True
B)False
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Page 7
Chapter 6: Efficient Capital Markets
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Q1) In tests of the semistrong-form EMH,it is not necessary to use risk-adjusted rates of return.
A)True
B)False
Q2) Refer to Exhibit 6.4.What is the abnormal rate of return for Stock A when you consider its systematic risk measure (beta)?
A) 2.30%
B) 2.10%
C) 3.10%
D) 12.40%
E) None of the above
Q3) Refer to Exhibit 6.6.What is the abnormal rate of return for Stock B when you consider its systematic risk measure (beta)?
A) -0.8%
B) -1.2%
C) 1.3%
D) 2.4%
E) 6.6%
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Chapter 7: An Introduction to Portfolio Management
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Q1) Given the following weights and expected security returns,calculate the expected return for the portfolio.
\[\begin{array} { c c }
\text { Weight } & \text { Expertad Return } \\
\hline .20 & .06 \\
.25 & .08 \\
.30 & .10 \\
25 & 12
\end{array}\]
A) 0.085
B) 0.090
C) 0.092
D) 0.097
E) None of the above
Q2) In a three asset portfolio the standard deviation of the portfolio is one third of the square root of the sum of the individual standard deviations.
A)True
B)False
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Chapter 8: An Introduction to Asset Pricing Models
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Q1) The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n)
A) Zero beta model.
B) unstable beta or a higher borrowing rate.
C) Zero beta model or a higher borrowing rate.
D) higher borrowing rate.
E) unstable beta.
Q2) Calculate the expected return for C Inc.which has a beta of 0.8 when the risk free rate is 0.04 and you expect the market return to be 0.12.
A) 8.10%
B) 9.60%
C) 10.40%
D) 11.20%
E) 12.60%
Q3) The capital market line is the tangent line between the risk free rate of return and the efficient frontier.
A)True
B)False
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Chapter 9: Multifactor Models of Risk and Return
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Q1) One approach for using multifactor models is to use factors that capture systematic risk.Which of the following is <b>not </b>a common factor used in this approach?
A) Unexpected changes in inflation
B) Consumer confidence
C) Yield curve shifts
D) Unexpected changes in real GDP
E) All of the above are common factors used to measure systematic risk
Q2) In one of their empirical tests of the APT,Roll and Ross examined the relationship between a security's returns and its own standard deviation.A finding of a statistically significant relationship would indicate that
A) APT is valid because a security's unsystematic component would be eliminated by diversification.
B) APT is valid because non-diversifiable components should explained by factor sensitivities.
C) APT is invalid because a security's unsystematic component would be eliminated by diversification.
D) APT is invalid because standard deviation is not an appropriate factor.
E) None of the above.
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Chapter 10: Analysis of Financial Statements
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Q1) Refer to Exhibit 10.9.Calculate the profit margin for the firm.
A) 22.5%
B) 18.4%
C) 17.6%
D) 15.3%
E) 11.9%
Q2) Refer to Exhibit 10.3.Calculate the receivables turnover ratio.
A) 50
B) 25
C) 55
D) 36
E) 27
Q3) Refer to Exhibit 10.3.Calculate the payables turnover ratio.
A) 30.3
B) 23.3
C) 55.4
D) 11.6
E) 56.6
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Chapter 11: Security Valuation Principles
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Q1) Refer to Exhibit 11.7.The present value today of dividends for years 1 to 3 is
A) $4.67
B) $3.08
C) $5.67
D) $4.5
E) $1.53
Q2) The Absolute Finance Company (AFC)earned $5 a share last year and paid a dividend of $2 per share.Next year,you expect AFC to earn $6 a share next year and continue its payout ratio.Assume that you expect to sell the stock for $45 a year from now.If you require a 13 percent return on this stock,how much would you be willing to pay for it?
A) $41.95
B) $43.21
C) $45.13
D) $46.72
E) $47.40
Q3) The most difficult part of valuing a bond is determining the required rate of return on this investment.
A)True
B)False
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Chapter 12: Macroanalysis and Microvaluation of the Stock Market
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Q1) Refer to Exhibit 12.3.What is the expected sustainable growth rate?
A) 5.85
B) 7.15
C) 4.05
D) 6.75
E) 8.25
Q2) The economy and the stock market have a strong,consistent relationship,but the stock market generally turns before the economy does.
A)True
B)False
Q3) The valuation techniques presented in the chapter can only be applied to the stock market in the United States,since the U.S.stock market is inefficient.
A)True
B)False
Q4) Recent studies indicate that one can earn excess returns in the stock market by forecasting unanticipated changes in the money supply.
A)True
B)False
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Chapter 13: Industry Analysis
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Q1) The fact that all firms in an industry do not move together negates the value of industry analysis.
A)True
B)False
Q2) During which industry life cycle stage do firms experience low rates of return on capital and investors begin to seek alternative uses of capital?
A) Pioneering and development
B) Mature growth
C) Stabilization and market maturity
D) Deceleration of growth and decline
E) Disassembly and restructure
Q3) The way to reduce the rivalry between existing competitors in an industry is to reduce the barrier to entry to the industry.
A)True
B)False
Q4) Because all firms in an industry do not move together there is little value in industry analysis.
A)True
B)False
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Chapter 14: Company Analysis and Stock Valuation
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Q1) Underpriced stocks can be ranked using the excess return ratio which is calculated as the Market price/Risk free rate.
A)True
B)False
Q2) What is the implied growth duration of Freed Industries given the following: \[\begin{array} { l c c }
& \text { Susp Industrials } & \text { Frepd Industries } \\ \text { P/ERatios } & 19 & 22 \\
\text { Average Guoth (\%) } & 11.0 & 16.0 \\
\text { Dividend Yield } & 0.33 & { 0.08 } \end{array}\]
A) 1.8 years
B) 1.3 years
C) 5.0 years
D) 4.5 years
E) 3.5 years
Q3) The constant growth dividend growth model is not appropriate for the valuation of growth companies.
A)True B)False
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Chapter 15: Equity Portfolio Management Stragtegies
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Q1) Value stocks would have the following characteristics:
A) Low price/book, high price/earnings.
B) Low price/book, low price/earnings.
C) High EPS growth, high profitability.
D) Low EPS growth, high profitability.
E) None of the above.
Q2) A portfolio manager who is trying to generate alpha could use
A) Hedge funds
B) Mutual funds
C) Insured asset allocation
D) ETFs
E) None of the above
Q3) If the annual geometric mean for the equity risk premium is 8.4 percent,what percentage of the equity risk premium is consumed by trading costs of 1.2 percent?
A) 7.20%
B) 9.60%
C) 9.70%
D) 10.08%
E) 14.29%
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Chapter 16: Technical Analysis
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Q1) If 10 percent of the stocks are selling above their 200 day moving average,the market is considered to be oversold.
A)True
B)False
Q2) Which of the following is <b>not</b> considered a contrary trading rules?
A) Futures traders bullish on stock index futures
B) Investment advisory opinions
C) Credit balance in brokerage accounts
D) CBOE put/call ratio
E) Confidence index
Q3) Technicians believe,when the relative strength index is stable or ____,during a ____ market,the stock should do well during a ____ market.
A) Decreases, bull, bear.
B) Increases, bear, bull.
C) Decreases, bear, bull.
D) Increases, bull, bear.
E) None of the above.
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Chapter 17: Bond Fundamentals
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Q1) The coupon of a bond indicates the income that the bond investor will receive over the life of the bond.
A)True B)False
Q2) In the case of a bond,the only contractual factor is the amount of interest payments,since beginning and ending bond prices are determined by market forces.
A)True B)False
Q3) The institutions which invest most heavily in corporate bond issues are
A) Life insurance companies and commercial banks.
B) Life insurance companies and property and liability insurance companies.
C) Life insurance companies and pension funds.
D) Commercial banks and property and liability insurance companies.
E) Commercial banks and pension funds.
Q4) High-yield bonds are considered "investment" grade. A)True B)False
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Chapter 18: The Analysis and Valuation of Bonds
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Q1) The position of a bondholder that is long a callable bond is equal to being
A) Long a noncallable bond + long a call option on the bond.
B) Long a noncallable bond + short a call option on the bond.
C) Short a noncallable bond + long a call option on the bond.
D) Short a noncallable bond + short a call option on the bond.
E) None of the above.
Q2) A 15-year bond has a $1,000 par value bond,a 4% coupon and a yield to maturity of 3.3%.Interest is paid annually.The bond's current yield is
A) 3.7%
B) 4.0%
C) 3.3%
D) 7.3%
E) None of the above
Q3) Option adjusted duration can be calculated as
A) Duration of noncallable bond - duration of call option on the bond.
B) Duration of noncallable bond + duration of call option on the bond.
C) Duration of callable bond - duration of call option on the bond.
D) Duration of callable bond + duration of call option on the bond.
E) None of the above.
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Chapter 19: Bond Portfolio Management Strategies
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Q1) Horizon matching is a combination of
A) Cash-matching dedication and interest rates swaps.
B) Cash-matching dedication and immunization.
C) Interest rate swaps and immunization.
D) Enhanced indexing and immunization.
E) Enhanced indexing and interest rate swaps.
Q2) Refer to Exhibit 19.6.The realized compound yield on the current bond is
A) 10.00%
B) 11.9985%
C) 12.9397%
D) 13.9399%
E) 12.3585%
Q3) A substitution swap relies heavily on interest rate expectations.
A)True
B)False
Q4) An investor in a pure yield pickup swap is most concerned about changes in interest rates.
A)True B)False
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Chapter 20: An Introduction to Derivative Markets and Securities
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Q1) Consider a stock that is currently trading at $20.Calculate the intrinsic value for a put option that has an exercise price of $35.
A) $15
B) $55
C) $35
D) -$15
E) $0
Q2) A stock currently sells for $75 per share.A put option on the stock with an exercise price $70 currently sells for $0.50.The put option is
A) At-the-money.
B) In-the-money.
C) Out-of-the-money.
D) At breakeven.
E) None of the above.
Q3) Futures contracts are slower to absorb new information than forward contracts.
A)True
B)False
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Chapter 21: Forward and Futures Contracts
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Q1) Refer to Exhibit 21.10.If the futures contract was currently available for 1350,calculate the arbitrage profit.
A) $8.33
B) $28.45
C) $45.67
D) $50.00
E) $54.33
Q2) Forward contracts are individually designed agreements,and can be tailored to the specific needs of the ultimate end-user.
A)True
B)False
Q3) Refer to Exhibit 21.1.Explain how you would go about hedging the bond issue?
A) Sell 1,000 contracts
B) Buy 1,000 contracts
C) Sell 100 contracts
D) Sell 10,000 contracts
E) None of the above
Q4) The basis is the spot price minus the future price.
A)True
B)False
Page 23
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Chapter 22: Option Contracts
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Q1) Risk management is the driving force behind the futures options market.
A)True
B)False
Q2) Refer to Exhibit 22.4.Calculate the payoffs of a long straddle at a stock price at expiration of $20 and a stock price at expiration of $45.
A) $6.35, $18.85
B) $29.65, $42.15
C) $21.65, $34.15
D) $8, $8
E) -$8, -$8
Q3) Refer to Exhibit 22.4.A short straddle is an appropriate strategy if
A) An investor wishes to generate additional income.
B) An investor wished to insure against a decline in share values.
C) An investor expected share prices to be volatile.
D) An investor expected share prices to remain in a trading range.
E) An investor expected share prices to be volatile, but was inclined to be bullish.
Q4) Index options are settled by delivery of the stocks that make up the index.
A)True
B)False
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Chapter 23: Swap Contracts,convertible Securities,and
Other Embedded Derivatives
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Q1) In a forward rate agreement (FRA)two parties agree today to a future exchange of cash flows based on two different interest rates.
A)True
B)False
Q2) Refer to Exhibit 23.4.Describe the transaction that occurs between PU and the swap dealer if the monthly average oil futures settlement price is $58.45.
A) PU pays the swap dealer $725,000.
B) The swap dealer pays PU $725,000.
C) PU pays the swap dealer $475,000.
D) The swap dealer pays PU $475,000.
E) None of the above.
Q3) The conversion premium for a convertible bond is calculated as:
A) (Market Price + Minimum Value)/Minimum Value.
B) (Market Price/Minimum Value) × Minimum Value.
C) (Market Price + Minimum Value) × Minimum Value.
D) (Market Price - Minimum Value)/Minimum Value.
E) (Market Price × Minimum Value)/Minimum Value.
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Chapter 24: Professional Money Management, alternative
Assets, and Industry Ethics
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Q1) Refer to Exhibit 24.1.What is the offering price for the fund if the NAV is $25.25 and the load is 6 percent?
A) $26.19
B) $23.74
C) $25.25
D) $26.77
E) $24.13
Q2) A common hedge fund strategy known as long-short equity is a type of arbitrage strategy.
A)True
B)False
Q3) Funds that attempt to provide current income,safety of principal and liquidity are known as
A) Balanced funds.
B) Flexible funds.
C) Income funds.
D) Money market funds.
E) Index funds.
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Chapter 25: Evaluation of Portfolio Performance
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Q1) Refer to Exhibit 25.5.Compute the Jensen Measure for the YYY fund.
A) 6.98
B) 2.35
C) 2.53
D) 3.86
E) 1.72
Q2) Refer to Exhibit 25.9.Calculate the Sharpe Measure for each portfolio.
A) A1 = 0.40, A2 = 0.31, A3 = 0.65, A4 = 0.66
B) A1 = 0.31, A2 = 0.66, A3 = 0.65, A4 = 0.40
C) A1 = 0.66, A2 = 0.65, A3 = 0.31, A4 = 0.40
D) A1 = 0.66, A2 = 0.31, A3 = 0.65, A4 = 0.40
E) None of the above
Q3) A portfolio's gross selectivity is made up of
A) Manager's risk.
B) Net selectivity.
C) Diversification.
D) a and b.
E) b and c.
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Chapter 26: Investment Return and Risk Analysis Questions
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Q1) An investment has a standard deviation of 12 percent and an expected return of 7 percent.What is the coefficient of variation for this investment?
A) 1.714
B) 1.372
C) 0.714
D) 0.583
E) 0.500
Q2) Refer to Exhibit 1A.1.The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q3) Refer to Exhibit 1A.2.The standard deviation for project X is
A) -1.581 percent
B) 0.000 percent
C) 1.581 percent
D) 2.738 percent
E) 5.000 percent
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Chapter 27: Investment and Retirement Plans
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Q1) Banks must compete for funds (savings deposits,CD's,etc.)in order to make loans and other types of investments.
A)True
B)False
Q2) Many endowments are tax-exempt.
A)True
B)False
Q3) Endowment funds
A) Are formed from the contributions to charitable and educational institutions.
B) Are attractive investments for individuals with low liquidity needs.
C) Usually have very short investment horizons.
D) Provide retirement benefits for public employees.
E) Provide death benefits for its contributor's survivors.
Q4) The retirement plan that promises to pay a specific benefit to its beneficiaries is
A) A defined contribution plan.
B) A defined benefit pension plan.
C) A non-contribution pension plan.
D) An actuarial pension plan.
E) Supplemental Retirement Account (SRA).
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Chapter 28: Calculating Covariance and Correlation
Coefficient of Assets
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Q1) Refer to Exhibit 3A.1.Calculate the coefficient of correlation.
A) -0.456
B) -0.354
C) 0.000
D) 0.456
E) 3.538
Q2) Refer to Exhibit 3A.1.Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
Q3) What is the correlation coefficient for two assets with a covariance of .0032,if asset 1 has a standard deviation of 12 percent and asset 2 has a standard deviation of 9 percent?
A) 0.2963
B) 0.3456
C) 0.8721
D) 1.5980
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Chapter 29: Portfolio Variance and Stock Weight
Calculations
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Q1) Refer to Exhibit 7A.1.What weight of security 1 gives the minimum portfolio variance when r<sub>1.2 </sub>= .60,E(?<sub>1</sub>)= .10 and E(?<sub>2</sub>)= .16?
A) .0244
B) .3679
C) .5697
D) .6309
E) .9756
Q2) Refer to Exhibit 7A.1.Show the minimum portfolio variance for a two stock portfolio when r<sub>1.2</sub> = 1.
A) E(?<sub>2</sub>) ¸ [E(?<sub>1</sub>) - E(?<sub>2</sub>)]
B) E(?<sub>2</sub>) ¸ [E(?<sub>1</sub>) + E(?<sub>2</sub>)]
C) E(?<sub>1</sub>) ¸ [E(?<sub>1</sub>) - E(?<sub>2</sub>)]
D) E(?<sub>1</sub>) ¸ [E(?<sub>1</sub>) + E(?<sub>2</sub>)]
E) None of the above
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Chapter 30: Portfolio Optimization with Negative
Correlation: Finding Minimum Variance and Weight
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Source URL: https://quizplus.com/quiz/24349
Sample Questions
Q1) Refer to Exhibit 7B.1.Show the minimum portfolio variance for a portfolio of two risky assets when r . = -1.
A) E( 1) ¸ [E( 1) + E( 2)]
B) E( 1) ¸ [E( 1) - E( 2)]
C) E( 2) ¸ [E( 1) + E( 2)]
D) E( 2) ¸ [E( 1) - E( 2)]
E) None of the above
Q2) Refer to Exhibit 7B.1.What is the value of W when r . = -1 and E(s )= .10 and E(s )= .12?
A) 45.46%
B) 50.00%
C) 59.45%
D) 54.55%
E) 74.55%
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