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Portfolio Management.

1. Which of the following statements best describes a performance evaluation?

A. An analysis of current market trends to determine future investment opportunities

B. An assessment of a money manager’s ability to balance high returns with an acceptable level of risk

C. An assessment of the level of risk in a portfolio to determine whether immunization is necessary

D. An accounting of a portfolio’s raw return

2. If a security plots above the security market line (SML),

A. it’s considered to be a good purchase because it is underpriced.

B. it’s considered to have a high degree of risk in relation to the market average.

C. it’s considered to have low degree of risk in relation to the market average.

D. it’s considered to be a poor purchase because it is overpriced.

3. What does the R-squared value indicate?

A. The percentage of a fund’s movement explained by movements in the market

B. The covariance between two portfolios

C. The percentage of a fund’s return which exceeds the market return

D. The correlation between the movement of two stocks

4. Which formula’s primary purpose is to evaluate the probability of a significant loss?

A. Treynor ratio B. Value-at-Risk C. Asset intensity D. Jensen’s alpha.

5. A risky asset has a beta of 1.72 and an expected return of 15.84 percent. What’s the risk-free rate if the risk-to-reward ratio is 7.1 percent?

A. 4.58% B. 4.21% C. 3.63% D. 3.94%

6. Your portfolio has a standard deviation of 18.8 percent and an average return of 12.2 percent. Given the following information, you have a 2.5 percent chance of losing what percentage in a given year?

Probability of Loss

“z” Value

1.0%

2.326

2.5%

1.960

5.0%

1.645

A. –12.348%

B. –15.324%

C. –24.648%

D. –23.491%

7. The U.S. Treasury bill is yielding 3.28 percent and the market has an expected return of 12.5 percent. What’s the Sharpe ratio of a portfolio that has a beta of 1.53 and a variance of .036512?

A. .83 B. .87 C. .74 D. .79

8. What’s the primary goal of diversification?

A. Reducing some risks B. Increasing portfolio return

C. Reducing taxes D. Increasing portfolio yield

9. A stock has a return of 12.9 percent and a beta of 1.27. The market return is 12.6 percent and the risk-free rate is 4.13 percent. What’s the Jensen alpha of this stock?

A. 1.73% B. 1.56% C. –1.56% D. –1.73%

10. Stock A has a standard deviation of 22 percent per year and stock B has a standard deviation of 11 percent per year. The correlation between Stock A and Stock B is .30. You have a portfolio of these two stocks wherein stock B has a portfolio weight of 35 percent. What’s your portfolio variance?

A. .003919 B. .004218 C. .034682 D. .015312

11. A risky security has a variance of .052180 and a covariance with the market of .0314. The variance of the market is .02121. What’s the correlation of the risky security to the market?

A. .94 B. .87 C. .91 D. .83

12. A stock has an expected return of 18 percent in a boom economy and 11 percent in a normal economy. The probability of a boom is 25 percent and the probability of a normal economy is 75 percent. What’s the variance of the expected returns?

A. 12.34 B. 7.59 C. 9.19 D. 5.81

13. Which one of the following is another name for market risk?

A. Systematic risk B. Firm-specific risk C. Event risk D. Diversifiable risk

14. How can unsystematic risk be eliminated?

A. Through portfolio immunization B. By increasing a portfolio’s beta

C. Through portfolio diversification D. By reducing a portfolio’s standard deviation

15. You own a stock with an overall expected return of 18.32 percent. The economy is expected to either boom or be normal. There’s a 65 percent chance the economy will boom. If the economy booms, this stock is expected to return 23 percent. What’s the expected return on the stock if the economy is normal?

A. 9.63% B. 10.25% C. 8.51% D. 11.84%

16. A common stock has an expected return of 15.9 percent. The market return is 8.8 percent and the risk-free return is 5.3 percent. What is the stock’s beta?

A. 2.95 B. 2.25 C. 3.03 D. 2.76

17. Which of the following is equal to the market risk premium?

A. Standard deviation B. The slope of the security market line

C. The correlation coefficient D. The risk-free rate of return

18. Which of the following affect the expected rate of return for a portfolio?

I. weight of each security held in the portfolio

II. the probability of various economic states occurring

III. the variance of each individual security

IV. the expected rate of return of each security given each economic state

A. II and IV only B. I, II, and IV only C. I and IV only D. II, III, and IV only

19. If a company announced earnings per share of $1.24 for the quarter when analysts expected earnings of $68, what is the amount of the surprise portion of the announcement?

A. $.56 B. $.32 C. $.51 D. $.42

20. The market has a standard deviation of 13.4 percent (0.134) while a risky security has a standard deviation of 27.2 percent (0.272). The covariance of the stock with the market is .0173. What’s the beta of the stock?

A. 1.04 B. 1.15 C. .96 D. .89