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INSTANT DOWNLOAD COMPLETE TEST BANK WITH ANSWERS

 

ISBN-10: 0324665105
ISBN-13: 9780324665109

 
Portfolio Construction Management And Protection 5th Edition by R. A. Strong – Test Bank
Sample  Questions

 

Chapter Three

 

Setting Portfolio Objectives

 

 

A         1.  Two dominant factors contributing to a successful investment program are

  1. suitable investment objectives and policy, and successful managers
  2. suitable investment objectives and risk assessment
  3. successful managers and successful income generation
  4. accurate risk assessment and measurement of historical return

 

B         2.  To an investment professional, which of the following provides no growth?

  1. Real estate
  2. Savings accounts
  3. Common stock
  4. Corporate bonds

 

B         3.  With bequests, a semantic problem sometimes develops with regard to the meaning of the terms

  1. growth and income
  2. principal and interest
  3. risk and return
  4. present value and future value

 

D         4.  A good example of the issue of multiple portfolio beneficiaries is found in people

  1. who want income and those who want growth
  2. who are risk averse and those who are not
  3. who pay taxes and those who do not
  4. today and people tomorrow

 

A         5.  Which of the following deals with decisions that have been made about long-term investment activities, eligible investment categories, and the allocation of funds among the eligible investment categories?

  1. Investment policy
  2. Investment strategy
  3. Investment tactics
  4. Investment standards

 

 

 

 

 

C         6.  All of the following are principal portfolio objectives EXCEPT

  1. stability of principal
  2. capital appreciation
  3. growth and income
  4. income

 

A         7.  If someone wants no chance of a loss of principal value, the appropriate primary objective is

  1. stability of principal
  2. income
  3. growth of income
  4. capital appreciation

 

C         8.  If someone is concerned about inflation eroding purchasing power of regular income, the appropriate primary objective is

  1. stability of principal
  2. income
  3. growth of income
  4. capital appreciation

 

D         9.  A young, well-paid professional is best suited, on average, to which primary objective?

  1. Stability of principal
  2. Income
  3. Growth of income
  4. Capital appreciation

 

D         10.  In the early years, which primary objective generally results in the least income?

  1. Stability of principal
  2. Income
  3. Growth of income
  4. Capital appreciation

 

A         11.  A growth-of-income objective

  1. sacrifices some current return for some purchasing power protection
  2. generates maximum income as soon as possible
  3. makes only sparing use of equity securities
  4. generates income that declines over time

 

 

 

 

B         12.  Tax-free income can be earned by investing in

  1. corporate bonds
  2. municipal bonds
  3. treasury bonds
  4. common stock

 

C         13.  All investors seek to

  1. maximize their expected return
  2. minimize their risk exposure
  3. maximize their expected utility
  4. minimize the number of their capital losses

 

B         14. Some people do not like mutual funds because they

  1. have no tax advantages
  2. are not exciting
  3. offer less potential return than that available in securities
  4. are too risky

 

D         15.  Establishing a secondary objective helps the portfolio manager

  1. learn more about the client’s tax situation
  2. learn more about the client’s expected utility of investment
  3. determine the appropriate level of risk for the customer
  4. determine the necessary level of equity investment

 

 

C         16. Which of the following primary/secondary objective combinations is infeasible?

  1. Stability of principal, income
  2. Income, stability of principal
  3. Growth of income, stability of principal
  4. Capital appreciation, growth of income

 

A         17. Which of the following primary/secondary objective combinations is infeasible?

  1. Stability of principal, growth of income
  2. Income, growth of income
  3. Growth of income, capital appreciation
  4. Income, capital appreciation

 

B         18. Which of the following primary/secondary objective combinations is infrequent?

  1. Stability of principal, growth of income
  2. Income, capital appreciation
  3. Growth of income, capital appreciation
  4. Growth of income, stability of principal

 

A         19.  A disadvantage of portfolio splitting is that it

  1. enables overseers to avoid making tough decisions
  2. reduces current income
  3. reduces the potential for capital appreciation
  4. sacrifices liquidity

 

A         20.  A common third category of investment (in addition to bonds and stock) is

  1. cash equivalents
  2. municipal securities
  3. American depository receipts
  4. repurchase agreements

 

A         21.  Another name for portfolio dedication is

  1. liability funding
  2. technical analysis
  3. fundamental analysis
  4. strategic investment

 

B         22.  Cash matching involves assembling a portfolio such that it

  1. has the duration desired
  2. has a cash flow stream that matches the requirements of a liability stream
  3. optimizes the risk/return combination
  4. is informationally efficient

 

A         23.  Principal concerns in duration matching are the

  1. present value of the outflows and their duration
  2. future value of the outflows and their duration
  3. annuity value of the outflows
  4. certainty equivalent of the outflows and the present value of its duration

 

D         24.  To reduce the duration of a bond portfolio, managers often use

  1. shares of common stock
  2. hard asset investments
  3. preferred stock shares
  4. treasury bills

 

C         25.  The first mutual fund was founded in

  1. 1776
  2. 1815
  3. 1924
  4. 1957

 

C         26.  The approximate number of mutual funds in the United States is

  1. 100
  2. 1,000
  3. 10,000
  4. 30,000

 

A         27.  Which of the following trades on a stock exchange?

  1. A closed-end fund
  2. An open-end fund
  3. Any mutual fund
  4. Any investment company

 

C         28.  For an open-end mutual fund

  1. net asset value < market value
  2. net asset value > market value
  3. net asset value = market value
  4. net asset value is greater than or equal to market value

 

C         29.  If you buy shares in a load fund, you will pay

  1. net asset value
  2. less than net asset value
  3. more than net asset value
  4. cannot be determined

 

A         30.  Before buying mutual fund shares, prospective investors must receive a

  1. prospectus
  2. indenture
  3. debenture
  4. hypothecation agreement

 

B         31.  The portfolio objective with the highest risk is

  1. stability of principal
  2. capital appreciation
  3. income
  4. growth of income

 

D         32.  A client’s need for liquidity might best be addressed by

  1. investing in growth industry stocks
  2. investing in real estate
  3. increasing the proportion of bonds in the portfolio
  4. investing a portion of the portfolio in assets with checkwriting privileges

 

 

A         33.  Money market mutual funds are sometimes added in a portfolio to

  1. reduce the duration
  2. increase the duration
  3. move from an income objective to a growth in income objective
  4. decrease the short-term tax consequences

 

D         34.  An objective to lower the short-term taxes for a client might be addressed by including

  1. stocks in the utilities industry
  2. short-term U.S. Treasury securities
  3. long-term U.S. Treasury securities
  4. municipal bonds

 

C         35.  A no-load mutual fund means there are no

  1. management fees
  2. 12 b-1 fees
  3. selling fees
  4. stocks that pay dividends in this mutual fund

 

B         36.  A redemption fee is a cost to the

  1. manager of a mutual fund to pay for poor investment decisions
  2. manager of a mutual fund when he resigns
  3. investor of a mutual fund on the sale of shares
  4. investor of a mutual fund when performance is poor

 

D         37.  A mutual fund prospectus provides

  1. a forecast of future fund performance
  2. a forecast of the macroeconomy over the next year
  3. a forecast of the expected tax consequences over the next year
  4. provides the fund’s purpose and intended investment activity

 

A         38.  The majority of mutual funds can be classified as

  1. stock funds
  2. taxable bond funds
  3. municipal bond funds
  4. money market funds

 

D         39.  Which of the following deal with decisions that have been made about long-term decisions?

  1. Investment constraints
  2. Fiduciary interest
  3. Investment strategy
  4. Investment policy

Chapter Five

 

The Mathematics of Diversification

 

 

A         1.  The work of Harry Markowitz is based on the search for

  1. efficient portfolios
  2. undervalued securities
  3. the highest long-term growth rates
  4. minimum risk portfolios

 

B         2.  Securities A and B have expected returns of 12% and 15%, respectively.  If you put 30% of your money in Security A and the remainder in B, what is the portfolio expected return?

  1. 4%
  2. 1%
  3. 6%
  4. 3%

 

B         3.  Securities A and B have expected returns of 12% and 15%, respectively.  If you put 40% of your money in Security A and the remainder in B, what is the portfolio expected return?

  1. 4%
  2. 8%
  3. 6%
  4. 3%

 

B         4.  The variance of a two-security portfolio decreases as the return correlation of the two securities

  1. increases
  2. decreases
  3. changes in either direction
  4. cannot be determined

 

D         5.  A security has a return variance of 25%.  The standard deviation of returns is

  1. 5%
  2. 15%
  3. 25%
  4. 50%

 

 

 

 

C         6.  A security has a return variance of 16%.  The standard deviation of returns is

  1. 4%
  2. 16%
  3. 40%
  4. 50%

 

A         7.  Covariance is the product of two securities’

  1. expected deviations from their means
  2. standard deviations
  3. betas
  4. standard deviations divided by their correlation

 

C         8.  The covariance of a random variable with itself is

  1. its correlation with itself
  2. its standard deviation
  3. its variance
  4. equal to 1.0

 

D         9.  Covariance is _____ correlation is ______.

  1. positive, positive or negative
  2. negative, positive or negative
  3. positive or negative, positive or zero
  4. positive or negative, positive or negative

 

C         10.  For a six-security portfolio, it is necessary to calculate ___ covariances plus ___ variances.

  1. 36, 6
  2. 30, 6
  3. 15, 6
  4. 30, 12

 

B         11.  COV (A,B) = .335.  What is COV (B,A)?

  1. – 0.335
  2. 335
  3. (0.335 x 0.335)
  4. Cannot be determined

 

A         12.  One of the first proponents of the single index model was

  1. William Sharpe
  2. Robert Merton
  3. Eugene Fama
  4. Merton Miller

 

B         13.  Without knowing beta, determining portfolio variance with a sixty-security portfolio requires ___ statistics per security.

  1. 1
  2. 60
  3. 3600/2
  4. 3600

 

B         14.  Securities A, B, and C have betas of 1.2, 1.3, and 1.7, respectively.  What is the beta of an equally weighted portfolio of all three?

  1. 15
  2. 40
  3. 55
  4. 60

 

B         15.  Securities A, B, and C have betas of 1.2, 1.3, and 1.7, respectively.  What is the beta of a portfolio composed of 1/2 A and 1/4 each of B and C?

  1. 15
  2. 35
  3. 55
  4. 60

 

B         16.  A diversified portfolio has a beta of 1.2; the market variance is 0.25.  What is the diversified portfolio’s variance?

  1. 33
  2. 36
  3. 41
  4. 44

 

B         17.  Security A has a beta of 1.2; security B has a beta of 0.8.  If the market variance is 0.30, what is COV (A,B)?

  1. .255
  2. .288
  3. .314
  4. .355

 

B         18.  As portfolio size increases, the variance of the error term generally

  1. increases
  2. decreases
  3. approaches 1.0
  4. becomes erratic

 

 

 

C         19.  The least risk portfolio is called the

  1. optimum portfolio
  2. efficient portfolio
  3. minimum variance portfolio
  4. market portfolio

 

B         20.  Industry effects are associated with

  1. the single index model
  2. the multi-index model
  3. the Markowitz model
  4. the covariance matrix

 

A         21.  COV (A,B) is equal to

  1. the product of their standard deviations and their correlation
  2. the product of their variances and their correlation
  3. the product of their standard deviations and their covariances
  4. the product of their variances and their covariances

 

A         22.  The covariance between a constant and a random variable is

  1. zero
  2. 0
  3. their correlation
  4. the product of their betas

 

D         23.  The covariance between a security’s returns and those of the market index is 0.03.  If the security beta is 1.15, what is the market variance?

  1. 005
  2. 010
  3. 021
  4. 026

 

D         24.  COV(A,B) = 0.50; the variance of the market is 0.25, and the beta of Security A is 1.00.  What is the beta of security B?

  1. 00
  2. 25
  3. 50
  4. 00

 

 

 

 

 

D         25.  There are 1,700 stocks in the Value Line index.  How many covariances would have to be calculated in order to use the Markowitz full covariance model?

  1. 1,700
  2. 5,650
  3. 12,350
  4. 1,444,150

 

A         26.  There are 1,700 stocks in the Value Line index.  How many betas would have to be calculated in order to find the portfolio variance?

  1. 1,700
  2. 5,650
  3. 12,350
  4. 1,444,150

 

A         27.  Knowing beta, determining the portfolio with a sixty-security fully diversified portfolio requires ______ statistic(s) per security.

  1. 1
  2. 60
  3. 3600/2
  4. 3600

 

A         28.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the expected return for a portfolio with 80% invested in Stock A and 20% invested in Stock B?

  1. 17%
  2. 19%
  3. 21%
  4. 23%

 

B         29.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the standard deviation for a portfolio with 80% invested in Stock A and 20% invested in Stock B?

  1. 15.8%
  2. 18.4%
  3. 22.0%
  4. 28.0%

 

 

A         30.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the beta for a portfolio with 80% invested in Stock A and 20% invested in Stock B?

  1. 57
  2. 77
  3. 97
  4. 17

 

A         31.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the covariance between Stock A and Stock B?

  1. 0.015
  2. 0.025
  3. 0.035
  4. 0.045

 

C         32.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the percent invested in Stock A to yield the minimum standard deviation portfolio containing Stock A and Stock B?

  1. 25%
  2. 50%
  3. 75%
  4. 90%

 

C         33.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the expected return for a portfolio with 50% invested in Stock A and 50% invested in Stock B?

  1. 18%
  2. 19%
  3. 20%
  4. 21%

 

 

 

 

B         34.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the standard deviation for a portfolio with 50% invested in Stock A and 50% invested in Stock B?

  1. 15%
  2. 20%
  3. 23%
  4. 25%

 

C         35.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the beta for a portfolio with 50% invested in Stock A and 50% invested in Stock B?

  1. 0.425
  2. 0.625
  3. 0.825
  4. 1.125

 

B         36.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the expected return for a portfolio with 70% invested in Stock M and 30% invested in Stock N?

  1. 11%
  2. 13%
  3. 15%
  4. 17%

 

C         37.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the standard deviation for a portfolio with 70% invested in Stock M and 30% invested in Stock N?

  1. 5%
  2. 6%
  3. 7%
  4. 0%

 

 

 

B         38.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the covariance between Stock M and Stock N?

  1. 01052
  2. 01875
  3. 03425
  4. 04775

 

D         39.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the percent invested in Stock M to yield the minimum standard deviation portfolio containing Stock M and Stock N?

  1. 34%
  2. 55%
  3. 73%
  4. 92%

 

A         40.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the expected return for a portfolio with 80% invested in Stock M and 20% invested in Stock N?

  1. 12%
  2. 14%
  3. 16%
  4. 18%

 

B         41.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the standard deviation for a portfolio with 80% invested in Stock M and 20% invested in Stock N?

  1. 2%
  2. 1%
  3. 3%
  4. 5%

 

 

 

 

A         42.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the beta for a portfolio with 80% invested in Stock M and 20% invested in Stock N?

  1. 0.688
  2. 0.738
  3. 0.878
  4. 0.968

 

The next 8 questions relate to the following table of information:

 

Stock X            Stock Y

 

Expected Return                    14%                  18%

Standard Deviation               40%                  54%

Beta                                         1.20                  1.50

Correlation (X,Y)  =  0.25

 

C         43.  What is the expected return for a portfolio with 60% invested in X and 40% invested in Y?

  1. 4%
  2. 9%
  3. 6%
  4. 1%

 

B         44.  What is the standard deviation for a portfolio with 60% invested in X and 40% invested in Y?

  1. 4%
  2. 1%
  3. 2%
  4. 6%

 

C         45.  What is the beta for a portfolio with 60% invested in X and 40% invested in Y?

  1. 12
  2. 22
  3. 32
  4. 42

 

 

 

 

D         46.  What is the covariance between Stock X and Stock Y?

  1. 025
  2. 033
  3. 047
  4. 054

 

D         47.  What is the percent invested in Stock X to yield the minimum variance portfolio with Stock X and Stock Y?

  1. 21
  2. 38
  3. 51
  4. 69

 

D         48.  What is the expected return for a portfolio with 20% invested in X and 80% invested in Y?

  1. 9%
  2. 6%
  3. 5%
  4. 2%

 

B         49.  What is the standard deviation for a portfolio with 20% invested in X and 80% invested in Y?

  1. 2%
  2. 8%
  3. 1%
  4. 6%

 

D         50.  What is the beta for a portfolio with 20% invested in X and 80% invested in Y?

  1. 14
  2. 24
  3. 34
  4. 44

Chapter Thirteen

 

The Role of Real Assets

 

 

B         1.  Classical characteristics of land include all of the following except

  1. it is immobile
  2. it is fungible
  3. it is indestructible
  4. it is non-income producing

 

B         2.  Which of the following is a financial asset?

  1. Gold bar
  2. Stock certificate
  3. Automobile
  4. Office building

 

D         3.  Which of the following is a real asset?

  1. Corporate bond
  2. Government bond
  3. Twenty dollar bill
  4. Computer

 

D         4.  ______ property is a legal interest in real estate.

  1. Personal
  2. Proprietary
  3. Financial
  4. Real

 

A         5.  Which of the following is a characteristic of a financial asset?

  1. It has a corresponding liability
  2. It produces income
  3. It usually shows price appreciation
  4. It usually generates no income

 

D         6.  The majority of institutional landowners are looking for

  1. annual cash flows
  2. long-term price appreciation
  3. short-term price appreciation
  4. a mix of annual cash flows and long-term price appreciation

 

 

B         7.  Of their investments in real estate, pension funds have about ____ of their money in timberland.

  1. 2%
  2. 4%
  3. 8%
  4. 12%

 

A         8.  Usual motivations for timberland investment include all of the following except

  1. regulatory defense
  2. collateral
  3. pure investment
  4. strategic investment

 

A         9.  State governments with large investments in timberland are

  1. California and New Hampshire
  2. Missouri and Maine
  3. Alabama and Texas
  4. Pennsylvania and New Jersey

 

B         10.  Growing trees are called

  1. land stands
  2. stumpage
  3. wood on the hoof
  4. volume land

 

C         11.  Conditions that make a section of land different than the surrounding terrain are called

  1. biological factors
  2. fungibility factors
  3. microsite factors
  4. acquisition factors

 

D         12.  A trained forest appraiser knows to look for forests undergoing

  1. a species shift
  2. a micro site shift
  3. mutual canopy support
  4. a product class shift

 

 

 

 

A         13.  Timberland losses due to fire, insects, and disease total less than _____ per year.

  1. 2%
  2. 2%
  3. 5%
  4. 10%

 

B         14.  Clear-cutting may be appropriate if a forest depends on

  1. river drainage
  2. mutual canopy support
  3. wetland waterfowl
  4. animal grazing

 

A         15.  A significant inhibition to timberland investment has historically been

  1. the lack of a standard timberland index
  2. adverse Internal Revenue Service rulings
  3. high commission costs
  4. inability to generate income

 

A         16.  One study indicates that the correlation coefficient between timberland and the S&P500 index is about

  1. -.50
  2. 0
  3. .50
  4. .95

 

C         17.  A common motivation for the purchase of gold is

  1. income generation
  2. tax advantages
  3. the security it provides
  4. a substitute for equity securities

 

D         18.  The price of gold is fixed daily in

  1. Budapest
  2. Washington, D. C.
  3. Amsterdam
  4. London

 

A         19.  The largest percentage of privately held gold is in

  1. France
  2. United States
  3. India
  4. Saudi Arabia

 

C         20.  Which of the following is generally not a driving force behind gold price movements?

  1. Inflation
  2. The strength of foreign currencies
  3. Supply
  4. Demand

 

A         21.  The primary advantage of gold certificates is

  1. convenience
  2. tax reasons
  3. added income producing ability
  4. added security against corporate default

 

D         22. For a U. S. coin in circulation, which of the following is usually highest?

  1. Numismatic value
  2. Intrinsic value
  3. Popular value
  4. Fiat value

 

C         23. Which of the following is not an official gold coin issued by a government?

  1. South African Krugerrand
  2. Canadian Maple Leaf
  3. Congolese Harmonica
  4. Chinese Panda

 

B         24. Land is widely considered to be a

  1. mobile investment
  2. long-term investment
  3. fungible investment
  4. financial asset

 

B         25.  Which of the following is not a way to invest in gold?

  1. Bullion
  2. Gold ADRs
  3. Gold certificates
  4. Shares in gold mining companies