### Sample Chapter

**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

- suitable investment objectives and policy, and successful managers
- suitable investment objectives and risk assessment
- successful managers and successful income generation
- accurate risk assessment and measurement of historical return

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

- Real estate
- Savings accounts
- Common stock
- Corporate bonds

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

- growth and income
- principal and interest
- risk and return
- present value and future value

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

- who want income and those who want growth
- who are risk averse and those who are not
- who pay taxes and those who do not
- 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?

- Investment policy
- Investment strategy
- Investment tactics
- Investment standards

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

- stability of principal
- capital appreciation
- growth and income
- income

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

- stability of principal
- income
- growth of income
- capital appreciation

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

- stability of principal
- income
- growth of income
- capital appreciation

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

- Stability of principal
- Income
- Growth of income
- Capital appreciation

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

- Stability of principal
- Income
- Growth of income
- Capital appreciation

**A **11. A growth-of-income objective

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

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

- corporate bonds
- municipal bonds
- treasury bonds
- common stock

**C **13. All investors seek to

- maximize their expected return
- minimize their risk exposure
- maximize their expected utility
- minimize the number of their capital losses

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

- have no tax advantages
- are not exciting
- offer less potential return than that available in securities
- are too risky

**D **15. Establishing a secondary objective helps the portfolio manager

- learn more about the client’s tax situation
- learn more about the client’s expected utility of investment
- determine the appropriate level of risk for the customer
- determine the necessary level of equity investment

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

- Stability of principal, income
- Income, stability of principal
- Growth of income, stability of principal
- Capital appreciation, growth of income

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

- Stability of principal, growth of income
- Income, growth of income
- Growth of income, capital appreciation
- Income, capital appreciation

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

- Stability of principal, growth of income
- Income, capital appreciation
- Growth of income, capital appreciation
- Growth of income, stability of principal

**A **19. A disadvantage of portfolio splitting is that it

- enables overseers to avoid making tough decisions
- reduces current income
- reduces the potential for capital appreciation
- sacrifices liquidity

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

- cash equivalents
- municipal securities
- American depository receipts
- repurchase agreements

**A **21. Another name for portfolio dedication is

- liability funding
- technical analysis
- fundamental analysis
- strategic investment

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

- has the duration desired
- has a cash flow stream that matches the requirements of a liability stream
- optimizes the risk/return combination
- is informationally efficient

**A **23. Principal concerns in duration matching are the

- present value of the outflows and their duration
- future value of the outflows and their duration
- annuity value of the outflows
- 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

- shares of common stock
- hard asset investments
- preferred stock shares
- treasury bills

**C **25. The first mutual fund was founded in

- 1776
- 1815
- 1924
- 1957

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

- 100
- 1,000
- 10,000
- 30,000

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

- A closed-end fund
- An open-end fund
- Any mutual fund
- Any investment company

** **

**C **28. For an open-end mutual fund

- net asset value < market value
- net asset value > market value
- net asset value = market value
- net asset value is greater than or equal to market value

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

- net asset value
- less than net asset value
- more than net asset value
- cannot be determined

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

- prospectus
- indenture
- debenture
- hypothecation agreement

**B** 31. The portfolio objective with the highest risk is

- stability of principal
- capital appreciation
- income
- growth of income

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

- investing in growth industry stocks
- investing in real estate
- increasing the proportion of bonds in the portfolio
- investing a portion of the portfolio in assets with checkwriting privileges

** **

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

- reduce the duration
- increase the duration
- move from an income objective to a growth in income objective
- decrease the short-term tax consequences

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

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

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

- management fees
- 12 b-1 fees
- selling fees
- stocks that pay dividends in this mutual fund

**B **36. A redemption fee is a cost to the

- manager of a mutual fund to pay for poor investment decisions
- manager of a mutual fund when he resigns
- investor of a mutual fund on the sale of shares
- investor of a mutual fund when performance is poor

**D** 37. A mutual fund prospectus provides

- a forecast of future fund performance
- a forecast of the macroeconomy over the next year
- a forecast of the expected tax consequences over the next year
- provides the fund’s purpose and intended investment activity

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

- stock funds
- taxable bond funds
- municipal bond funds
- money market funds

** **

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

- Investment constraints
- Fiduciary interest
- Investment strategy
- Investment policy

**Chapter Five**

**The Mathematics of Diversification**

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

- efficient portfolios
- undervalued securities
- the highest long-term growth rates
- 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?

- 4%
- 1%
- 6%
- 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?

- 4%
- 8%
- 6%
- 3%

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

- increases
- decreases
- changes in either direction
- cannot be determined

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

- 5%
- 15%
- 25%
- 50%

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

- 4%
- 16%
- 40%
- 50%

**A **7. Covariance is the product of two securities’

- expected deviations from their means
- standard deviations
- betas
- standard deviations divided by their correlation

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

- its correlation with itself
- its standard deviation
- its variance
- equal to 1.0

**D **9. Covariance is _____ correlation is ______.

- positive, positive or negative
- negative, positive or negative
- positive or negative, positive or zero
- positive or negative, positive or negative

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

- 36, 6
- 30, 6
- 15, 6
- 30, 12

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

- – 0.335
- 335
- (0.335 x 0.335)
- Cannot be determined

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

- William Sharpe
- Robert Merton
- Eugene Fama
- Merton Miller

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

- 1
- 60
- 3600/2
- 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?

- 15
- 40
- 55
- 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?

- 15
- 35
- 55
- 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?

- 33
- 36
- 41
- 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)?

- .255
- .288
- .314
- .355

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

- increases
- decreases
- approaches 1.0
- becomes erratic

**C **19. The least risk portfolio is called the

- optimum portfolio
- efficient portfolio
- minimum variance portfolio
- market portfolio

**B **20. Industry effects are associated with

- the single index model
- the multi-index model
- the Markowitz model
- the covariance matrix

**A **21. COV (A,B) is equal to

- the product of their standard deviations and their correlation
- the product of their variances and their correlation
- the product of their standard deviations and their covariances
- the product of their variances and their covariances

** **

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

- zero
- 0
- their correlation
- 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?

- 005
- 010
- 021
- 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?

- 00
- 25
- 50
- 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?

- 1,700
- 5,650
- 12,350
- 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?

- 1,700
- 5,650
- 12,350
- 1,444,150

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

- 1
- 60
- 3600/2
- 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?

- 17%
- 19%
- 21%
- 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?

- 15.8%
- 18.4%
- 22.0%
- 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?

- 57
- 77
- 97
- 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?

- 0.015
- 0.025
- 0.035
- 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?

- 25%
- 50%
- 75%
- 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?

- 18%
- 19%
- 20%
- 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?

- 15%
- 20%
- 23%
- 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?

- 0.425
- 0.625
- 0.825
- 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?

- 11%
- 13%
- 15%
- 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?

- 5%
- 6%
- 7%
- 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?

- 01052
- 01875
- 03425
- 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?

- 34%
- 55%
- 73%
- 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?

- 12%
- 14%
- 16%
- 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?

- 2%
- 1%
- 3%
- 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?

- 0.688
- 0.738
- 0.878
- 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?

- 4%
- 9%
- 6%
- 1%

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

- 4%
- 1%
- 2%
- 6%

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

- 12
- 22
- 32
- 42

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

- 025
- 033
- 047
- 054

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

- 21
- 38
- 51
- 69

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

- 9%
- 6%
- 5%
- 2%

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

- 2%
- 8%
- 1%
- 6%

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

- 14
- 24
- 34
- 44

**Chapter Thirteen**

** **

**The Role of Real Assets**

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

- it is immobile
- it is fungible
- it is indestructible
- it is non-income producing

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

- Gold bar
- Stock certificate
- Automobile
- Office building

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

- Corporate bond
- Government bond
- Twenty dollar bill
- Computer

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

- Personal
- Proprietary
- Financial
- Real

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

- It has a corresponding liability
- It produces income
- It usually shows price appreciation
- It usually generates no income

**D **6. The majority of institutional landowners are looking for

- annual cash flows
- long-term price appreciation
- short-term price appreciation
- 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.

- 2%
- 4%
- 8%
- 12%

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

- regulatory defense
- collateral
- pure investment
- strategic investment

**A **9. State governments with large investments in timberland are

- California and New Hampshire
- Missouri and Maine
- Alabama and Texas
- Pennsylvania and New Jersey

**B **10. Growing trees are called

- land stands
- stumpage
- wood on the hoof
- volume land

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

- biological factors
- fungibility factors
- microsite factors
- acquisition factors

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

- a species shift
- a micro site shift
- mutual canopy support
- a product class shift

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

- 2%
- 2%
- 5%
- 10%

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

- river drainage
- mutual canopy support
- wetland waterfowl
- animal grazing

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

- the lack of a standard timberland index
- adverse Internal Revenue Service rulings
- high commission costs
- inability to generate income

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

- -.50
- 0
- .50
- .95

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

- income generation
- tax advantages
- the security it provides
- a substitute for equity securities

** **

**D** 18. The price of gold is fixed daily in

- Budapest
- Washington, D. C.
- Amsterdam
- London

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

- France
- United States
- India
- Saudi Arabia

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

- Inflation
- The strength of foreign currencies
- Supply
- Demand

**A **21. The primary advantage of gold certificates is

- convenience
- tax reasons
- added income producing ability
- added security against corporate default

** **

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

- Numismatic value
- Intrinsic value
- Popular value
- Fiat value

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

- South African Krugerrand
- Canadian Maple Leaf
- Congolese Harmonica
- Chinese Panda

** **

**B** 24. Land is widely considered to be a

- mobile investment
- long-term investment
- fungible investment
- financial asset

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

- Bullion
- Gold ADRs
- Gold certificates
- Shares in gold mining companies

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