Portfolio Management Exam Preparation Guide
Course Introduction
Portfolio Management focuses on the principles and practices involved in constructing, managing, and evaluating investment portfolios. The course covers key topics such as asset allocation, diversification, risk assessment, security selection, and performance measurement. Students will explore modern portfolio theory, the Capital Asset Pricing Model (CAPM), and multi-factor models, learning how to balance risk and return for different classes of financial assets. Practical applications include analyzing portfolio strategies, understanding investor objectives, and adapting to changing market conditions, equipping students with the skills necessary to make informed investment decisions within institutional and individual contexts.
Recommended Textbook Investment Analysis and Portfolio Management 1st Canadian Edition by Frank K. Reilly
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Chapter 1: The Investment Setting
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Q1) Refer to Exhibit 1-9. Calculate your holding period return (HPR) for this investment in GE stock.
A) 0.9655
B) 1.0086
C) 1.0357
D) 1.0804
E) 1.0973
Answer: B
Q2) An individual who selects the investment that offers greater certainty when everything else is the same is known as a risk averse investor.
A)True
B)False
Answer: True
Q3) Refer to Exhibit 1-6. Calculate the risk premium for asset i
A) 4.5%
B) 8.25%
C) 4.75%
D) 3.5%
E) None of the above
Answer: B
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Chapter 2: The Asset Allocation Decision
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Q1) ____ refer(s) to the ability to convert assets to cash quickly and at a fair market price and often increase(s) as one approaches the later stages of the investment life cycle.
A) Liquidity needs
B) Time horizons
C) Liquidation values
D) Liquidation essentials
E) Capital liquidations
Answer: A
Q2) The first step in the investment process is the development of a(n)
A) Objective statement.
B) Policy statement.
C) Financial statement.
D) Statement of cash needs.
E) Statement of cash flows.
Answer: B
Q3) Investment planning is complicated by the tax code.
A)True
B)False
Answer: True
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Chapter 3: Selecting Investments in a Global Market
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Q1) The purchase and sale of commodities for current delivery and consumption is known as dealing in the _________________ market.
A) Futures
B) Spot
C) Money
D) Capital
E) Options
Answer: B
Q2) A return series has an arithmetic mean of 10.5% and standard deviation of 13%. Assuming the returns are normally distributed, what is the range of returns that an investor would expect to receive 95% of the time?
A) 10.5% to 13%
B) -2.5% to 23.5%
C) -28.5% to 49.5%
D) -15.5% to 36.5%
E) 0% to 36.5%
Answer: C
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Chapter 4: Securities Markets and the Economy
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Q1) Only the stocks of large companies are traded in the primary market.
A)True
B)False
Q2) Investors can leverage their stock transactions with the use of
A) Margin orders
B) Stop loss orders
C) Limit orders
D) Market orders
E) Specialists
Q3) 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%
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Chapter 5: Efficient Capital Markets
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Q1) According to the strong-form efficient market hypothesis, stock prices fully reflect
A) All security market information only.
B) All public information only.
C) All public and private information only.
D) All of the above.
E) None of the above.
Q2) Which of the following behaviours is consistent with escalation bias?
A) Buying more of a stock as it increases in value.
B) Buying more of a stock as it decreases in value.
C) Selling a stock as it decreases in value.
D) Selling a stock as it increases in value.
E) Buying or selling a stock as it increases in value.
Q3) Refer to Exhibit 5-4. What is the abnormal rate of return for Stock B when you consider its systematic risk measure (beta)?
A) 0.1%
B) -1.4%
C) 0.5%
D) 1.5%
E) 2.0%
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Chapter 6: An Introduction to Portfolio Management
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Q1) Refer to Exhibit 6-14. What is the expected return of the stock A and B portfolio?
A) 17.0%
B) 17.5%
C) 18.0%
D) 18.5%
E) 19.0%
Q2) Consider two securities, A and B. Security A and B have a correlation coefficient of 0.65. Security A has standard deviation of 12, and security B has standard deviation of 25. Calculate the covariance between these two securities.
A) 300
B) 461.54
C) 261.54
D) 195
E) 200
Q3) A measure that only considers deviations above the mean is semi-variance.
A)True B)False
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Chapter 7: Asset Pricing Models: Capm and Apt
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Q1) Refer to Exhibit 7-3. What is the beta for Radtron using the true index?
A) 0.87
B) 0.97
C) 1.02
D) 1.15
E) 1.28
Q2) Refer to Exhibit 7-8. Assume that you wish to create a portfolio with no net wealth invested. The portfolio that achieves this has 50% in stock X, -100% in stock Y, and 50% in stock Z. The weighted exposure to risk factor 2 for stocks X, Y, and Z are
A) 0.50, -1.0, 0.50
B) -0.50, 1.0, -0.50
C) 0.60, -0.85, 0.25
D) -0.275, 0.10, 0.175
E) None of the above.
Q3) The betas of those companies compiled by Value Line Investment Services tend to be almost identical to those compiled by Merrill Lynch.
A)True
B)False
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Chapter 8: Economic and Industry Analysis
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Q1) Which of the following statements concerning the competitive environment is true?
A) High fixed costs encourage firms to produce at a low level of capacity, in order to minimize fixed cost per unit produced.
B) Low current prices relative to costs in an industry indicate low barriers to entry.
C) Substantial economies of scale do not give a current industry member an advantage over a new firm.
D) The ability to substitute another product limits the industry's profit potential.
E) Buyers and suppliers do not influence the profitability of an industry.
Q2) Refer to Exhibit 8-1. Calculate the industry year 2010 EBITDA per share.
A) $95.05
B) $89.15
C) $92.56
D) $94.73
E) $86.23
Q3) In the rapid accelerating growth stage, profit margins are typically very high.
A)True
B)False
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Chapter 9: Company Analysis and Stock Valuation
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Q1) Refer to Exhibit 9-4. Determine the P/E ratio for the Valentine Company assuming Valentine can maintain its superior growth rate for the next 5 years.
A) 23.7
B) 16.4
C) 15.3
D) 8.3
E) 3.8
Q2) Which of the following is not a technique for valuing a firm's common stock?
A) Present value of free cash flow to equity
B) Present value of dividends
C) Price-earnings ratio
D) Price-book value ratios
E) Price-cost of goods sold ratio
Q3) A growth company can invest in projects that generate a return greater than the firm's
A) Return on equity.
B) Cost of debt.
C) Cost of equity.
D) Cost of capital.
E) Return on assets.
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Chapter 10: Technical Analysis
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Q1) The ratio of OTC volume versus TSX volume a measure of ______. This ratio typically ______ at a market ______.
A) Speculative activity, bottoms, peak.
B) Hedging activity, Bottoms, peak.
C) Speculative activity, peaks, peak
D) Speculative activity, bottoms, bottoms.
E) None of the above.
Q2) A chart used to show only significant price changes, regardless of their timing, is the A) Candlestick chart
B) Multiple indicator chart
C) Bar chart
D) Point-and-figure chart
E) Point-and-click chart
Q3) Candlestick charts indicate the price change from open to close by shading whether the market went down or up for the day.
A)True
B)False
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Chapter 11: Bond Fundamentals
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Q1) Wealthy individual investors typically account for 90 to 95% of investors in the bond market.
A)True
B)False
Q2) The legal document setting forth the obligations of a bond's issuer is called
A) A debenture.
B) A warrant.
C) An indenture.
D) A rights certificate.
E) A trustee deed.
Q3) A 7.0% coupon bond issued by the provincial government of Alberta sells for $1,000. What coupon rate on a corporate bond selling at $1,000 par value would produce the same after tax return to the investor as the tax-free municipal bond if the investor is in the 29% marginal tax bracket?
A) 7.59%
B) 12.25%
C) 9.86%
D) 14.63%
E) 30.71%
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Chapter 12: The Analysis and Valuation of Bonds
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Q1) Suppose you have a 15%, 25 year bond traded at $975. If it is callable in 5 years at $1050, what is the bond's yield to call? Interest is paid annually.
A) 15%
B) 16.5%
C) 7.65%
D) 8.52%
E) 9.64%
Q2) An interest rate is the price of loanable funds.
A)True
B)False
Q3) Calculate the duration of a 6%, $1,000 par bond maturing in three years if the yield to maturity is 10% and interest is paid semiannually.
A) 1.35 years
B) 1.78 years
C) 2.50 years
D) 2.78 years
E) 2.95 years
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Chapter 13: An Introduction to Derivative Markets and Securities
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Q1) A stock currently sells for $75 per share. A call option on the stock with an exercise price $70 currently sells for $5.50. The call option is
A) At-the-money.
B) In-the-money.
C) Out-of-the-money.
D) At breakeven.
E) None of the above.
Q2) A primary function of futures markets is to allow investors to transfer risk.
A)True
B)False
Q3) A call option is in the money if the current market price is above the strike price. A)True
B)False
Q4) Refer to Exhibit 13-5. What is Sarah's annualized gain/loss?
A) 11.51% gain
B) 115.15% gain
C) 11.51% loss
D) 115.15% loss
E) None of the above
15
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Chapter 14: Derivatives: Analysis and Valuation
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Q1) Refer to Exhibit 14-10. Assume that one year later the fixed rate on a new 3-year receive fixed pay floating LIBOR swap has fallen to 7% per year. Settlement is on a semiannual basis. Calculate the market value of the FRN based on $100 face value.
A) $102.66
B) $100.00
C) $95.56
D) $89.63
E) $70.77
Q2) The value of a call option is positively related to:
A) Underlying stock price.
B) Time to expiration
C) Exercise price.
D) Choices a and b.
E) Choices b and c.
Q3) The intrinsic value of a warrant = (Market price of common stock + Warrant exercise price) ´ Number of shares specified by warrant.
A)True
B)False
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Chapter 15: Equity Portfolio Management Strategies
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Q1) The goal of a passive portfolio is to track the index as closely as possible.
A)True
B)False
Q2) A portfolio management strategy that overweights a particular industry, relative to the benchmark portfolio, based on the next expected phase of the business cycle is called
A) Tactical asset allocation.
B) Indexing.
C) Sector rotation.
D) Contrarian investing.
E) Bottom up investing.
Q3) Tracking error is defined as the degree to which the portfolio's returns deviate from those of the actual index.
A)True
B)False
Q4) Style investing allows control of the total portfolio to be shared between investment managers and pension fund managers.
A)True B)False
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Chapter 16: Bond Portfolio Management Strategies
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Q1) A substitution swap relies heavily on interest rate expectations.
A)True
B)False
Q2) A pure yield pickup swap involves swapping out of a
A) Bond to realize capital losses, into a comparable bond.
B) Low coupon bond, into a comparable high coupon bond.
C) High coupon bond, into a comparable low coupon bond.
D) Bond that is underpriced, into a comparable bond that is overpriced.
E) Bond that is overpriced, into a comparable bond that is underpriced.
Q3) For a bond investor selecting a buy-and-hold strategy, which of the following would be the least important consideration?
A) Term to maturity
B) Indenture provisions
C) Coupon levels
D) Liquidity
E) Quality
Q4) The components of interest rate risk are: price risk and maturity risk.
A)True
B)False
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Q1) The gross return of closed-end investments companies has typically been
A) 10-20% less than their NAV.
B) 10-15% less than their NAV.
C) Less than the net return.
D) About the same as the net return.
E) None of the above.
Q2) Which of the following are guiding principles for ethical behavior in the asset management industry as put forward by the CFA Center for Financial Market Integrity?
A) The interests of investment professional come first.
B) The preferred method for promoting fair and efficient markets is to set up a central oversight board.
C) Financial markets in various countries should develop high-quality standards for reporting financial information that reflect local customs.
D) Financial statements should be reported from the perspective of firm shareholders.
E) All of the above.
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Chapter 18: Evaluation of Portfolio Performance
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Q1) Which portfolio measurement uses the mean excess return in the numerator divided by the amount of residual risk that the investor incurred in pursuit of those excess returns?
A) Jensen measure.
B) Fama measure.
C) Sharpe measure.
D) Treynor ratio.
E) Information ratio.
Q2) Two desirable attributes of a portfolio manager's performance are the ability to derive above-average returns for a given risk class and the ability to time the market.
A)True
B)False
Q3) Refer to Exhibit 18-7. Calculate TI's overall performance.
A) 0.0113
B) 0.1200
C) 0.0670
D) 0.0530
E) 0.0696
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Chapter 19: Analysis of Financial Statements
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Q1) Refer to Exhibit 19-2. What was Star's net profit margin?
A) 2.4%
B) 3.8%
C) 4.2%
D) 4.7%
E) 5.2%
Q2) Some factors that determine financial risk include interest coverage and cash flow coverage.
A)True
B)False
Q3) The statement of cash flows shows the effect on the firm's cash flows of earnings and changes in the assets, current liabilities, long-term liabilities and net worth.
A)True
B)False
Q4) Financial ratios can be used to identify firms that might default on a loan or declare bankruptcy.
A)True
B)False
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Chapter 20: An Introduction to Security Valuation
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Q1) Refer to Exhibit 20-6. What is the future price of the stock in year 5?
A) $113.40
B) $122.47
C) $132.27
D) $142.85
E) $154.35
Q2) The risk premium is impacted by business risk, financial risk, and liquidity risk.
A)True
B)False
Q3) Refer to Exhibit 20-5. How much should you be willing to pay for the stock if you feel that the 7% growth rate can be maintained indefinitely and you require a 16% return?
A) $11.15
B) $14.44
C) $14.86
D) $18.90
E) $19.24
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Chapter 21: Web Appendix: A Review of Statistics and the
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Q1) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q2) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
Q3) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
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Chapter
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Q1) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
Q2) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q3) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
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Chapter 23: Appendix: Objectives and Constraints of Institutional Investors
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Q1) 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.
Q2) Banks must compete for funds (savings deposits, CDs, etc.) in order to make loans and other types of investments.
A)True
B)False
Q3) Many endowments are tax-exempt.
A)True
B)False
Q4) Banks typically
A) Have low liquidity needs.
B) Face very few federal and state regulatory constraints.
C) Don't have to compete for funds.
D) Have high liquidity needs and a short time horizons constraint.
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