AFW369E / AFW369

SECURITY INVESTMENT & PORTFOLIO MANAGEMENT

MID – SEMESTER EXAM [1.5 HOURS]

6 JANUARY 2022

1) The material wealth of society is determined by the economy's ________, which is a function of the

economy's ________.

A) investment bankers; financial assets

B) investment bankers; real assets

C) productive capacity; financial assets

D) productive capacity; real assets

2) Asset allocation refers to ________.

A) the allocation of the investment portfolio across broad asset classes

B) the analysis of the value of securities

C) the choice of specific assets within each asset class

D) none of the options

3) Security selection refers to the ________.

A) allocation of the investment portfolio across broad asset classes

B) analysis of the value of securities

C) choice of specific securities within each asset class

D) top-down method of investing

4) ________ portfolio management calls for holding diversified portfolios without spending effort or

resources attempting to improve investment performance through security analysis.

A) Active

B) Momentum

C) Passive

D) Market-timing

5) Financial intermediaries exist because small investors cannot efficiently ________.

A) diversify their portfolios

B) gather information

C) assess and monitor the credit risk of borrowers

D) all of the options

6) ________ portfolio construction starts with asset allocation.

A) Bottom-up

B) Top-down

C) Upside-down

D) Side-to-side

7) If you want to measure the performance of your investment in a fund, including the timing of your

purchases and redemptions, you should calculate the ________.

A) geometric average return

B) arithmetic average return

C) dollar-weighted return

D) index return

8) The arithmetic average of -11%, 15%, and 20% is ________.

A) 15.67%

B) 8%

C) 11.22%

D) 6.45%

9) An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The

total compound return over the 3 years was ________.

A) 41.68%

B) 11.32%

C) 3.64%

D) 13%

10) Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the annual

percentage rate of return for this investment?

A) 2.04%

B) 12 %

C) 12.24%

D) 12.89%

11) The market risk premium is defined as ________.

A) the difference between the return on an index fund and the return on Treasury bills

B) the difference between the return on a small-firm mutual fund and the return on the Standard & Poor's

500 Index

C) the difference between the return on the risky asset with the lowest returns and the return on Treasury

bills

D) the difference between the return on the highest-yielding asset and the return on the lowest-yielding

asset

12) Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should

invest entirely in a risky portfolio with a standard deviation of 24% only if the risky portfolio's expected

return is at least ________.

A) 8.67%

B) 9.84%

C) 21.28%

D) 14.68%

13) Consider a Treasury bill with a rate of return of 5% and the following risky securities:

Security A: E(r) = .15; variance = .0400

Security B: E(r) = .10; variance = .0225

Security C: E(r) = .12; variance = .1000

Security D: E(r) = .13; variance = .0625

The investor must develop a complete portfolio by combining the risk-free asset with one of the securities

mentioned above. The security the investor should choose as part of her complete portfolio to achieve the

best CAL would be ________.

A) security A

B) security B

C) security C

D) security D

14) A ________ gives its holder the right to buy an asset for a specified exercise price on or before a

specified expiration date.

A) call option

B) futures contract

C) put option

D) interest rate swap

15) A firm that has large securities holdings and wishes to raise money for a short length of time may be

able to find the cheapest financing from which of the following?

A) reverse repurchase agreement

B) bankers' acceptance

C) commercial paper

D) repurchase agreement

16) The purchase of a futures contract gives the buyer ________.

A) the right to buy an item at a specified price

B) the right to sell an item at a specified price

C) the obligation to buy an item at a specified price

D) the obligation to sell an item at a specified price

17) June call and put options on King Books Inc. are available with exercise prices of $30, $35, and $40.

Among the different exercise prices, the call option with the ________ exercise price and the put option with

the ________ exercise price will have the greatest value.

A) $40; $30

B) $30; $40

C) $35; $35

D) $40; $40

18) The Hang Seng index reflects market performance on which of the following major stock markets?

A) Japan

B) Singapore

C) Taiwan

D) Hong Kong

19) The Bursa KL Indec is ________ weighted index.

A) an equally

B) a price-

C) a value-

D) a share-

20) A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend

received by stock investors must have been ________ per share.

A) $0.55

B) $1.80

C) $0.45

D) $1.25

21) A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%,

while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on

A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The

standard deviation of the return on this portfolio is ________.

A) 23%

B) 19.76%

C) 18.45%

D) 17.67%

22) Risk that can be eliminated through diversification is called ________ risk.

A) unique

B) firm-specific

C) diversifiable

D) all of these options

23) Based on the outcomes in the following table, choose which of the statements below is (are) correct?

Scenario Security A Security B Security C

Recession Return > E(r) Return = E(r) Return < E(r)

Normal Return = E(r) Return = E(r) Return = E(r)

Boom Return < E(r) Return = E(r) Return > E(r)

I. The covariance of security A and security B is zero.

II. The correlation coefficient between securities A and C is negative.

III. The correlation coefficient between securities B and C is positive.

A) I only

B) I and II only

C) II and III only

D) I, II, and III

24) Adding additional risky assets to the investment opportunity set will generally move the efficient

frontier ________ and to the ________.

A) up; right

B) up; left

C) down; right

D) down; left

25) An investor's degree of risk aversion will determine his or her ________.

A) optimal risky portfolio

B) risk-free rate

C) optimal mix of the risk-free asset and risky asset

D) capital allocation line

26) You put half of your money in a stock portfolio that has an expected return of 14% and a standard

deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6%

and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard

deviation of the resulting portfolio will be ________.

A) more than 18% but less than 24%

B) equal to 18%

C) more than 12% but less than 18%

D) equal to 12%

27) Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate

of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a

standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is

________.

A) 10%

B) 20%

C) 40%

D) 60%

28) An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return

of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard

deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free

rate of return is 10%. The expected return on the optimal risky portfolio is ________.

A) 14%

B) 15.6%

C) 16.4%

D) 18%

29) Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ________ sensitive to

changes in the market than are the returns of stock B.

A) 20% more

B) slightly more

C) 20% less

D) slightly less

30) A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the

standard deviation of the stock is 35%. What is the stock's beta?

A) 1

B) .75

C) .60

D) .55

31) Which of the following are assumptions of the simple CAPM model?

I. Individual trades of investors do not affect a stock's price.

II. All investors plan for one identical holding period.

III. All investors analyze securities in the same way and share the same economic view of the world.

IV. All investors have the same level of risk aversion.

A) I, II, and IV only

B) I, II, and III only

C) II, III, and IV only

D) I, II, III, and IV

32) When all investors analyze securities in the same way and share the same economic view of the world,

we say they have ________.

A) heterogeneous expectations

B) equal risk aversion

C) asymmetric information

D) homogeneous expectations

33) Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the

beta on a stock with an expected return of 17%?

A) .5

B) .7

C) 1

D) 1.2

34) According to the capital asset pricing model, a security with a ________.

A) negative alpha is considered a good buy

B) positive alpha is considered overpriced

C) positive alpha is considered underpriced

D) zero alpha is considered a good buy

35) Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The variance of the

market portfolio return is 0.0225. If the risk-free rate of return is 4%, the expected return on the market

portfolio is ________.

A) 6.75%

B) 9%

C) 10.75%

D) 12%

36) Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is

8%, and the risk-free rate is 5%. The alpha of the stock is ________.

A) -1.7%

B) 3.7%

C) 5.5%

D) 8.7%

37) The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of

.8 to offer a rate of return of 12%, then you should ________.

A) buy stock X because it is overpriced

B) buy stock X because it is underpriced

C) sell short stock X because it is overpriced

D) sell short stock X because it is underpriced

38) Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an

expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is

5%. Security ________ would be considered the better buy because ________.

A) A; it offers an expected excess return of .2%

B) A; it offers an expected excess return of 2.2%

C) B; it offers an expected excess return of 1.8%

D) B; it offers an expected return of 2.4%

39) The SML is valid for ________, and the CML is valid for ________.

A) only individual assets; well-diversified portfolios only

B) only well-diversified portfolios; only individual assets

C) both well-diversified portfolios and individual assets; both well-diversified portfolios and individual

assets

D) both well-diversified portfolios and individual assets; well-diversified portfolios only

40) Beta is a measure of ________.

A) total risk

B) relative systematic risk

C) relative nonsystematic risk

D) relative business risk

41) The weak form of the EMH states that ________ must be reflected in the current stock price.

A) all past information, including security price and volume data

B) all publicly available information

C) all information, including inside information

D) all costless information

42) Random price movements indicate ________.

A) irrational markets

B) that prices cannot equal fundamental values

C) that technical analysis to uncover trends can be quite useful

D) that markets are functioning efficiently

43) Stock prices that are stable over time ________.

A) indicate that prices are useful indicators of true economic value

B) indicate that the market is not incorporating new information into current stock prices

C) ensure that an economy allocates its resources efficiently

D) indicates that returns follow a random-walk process

44) Which of the following is not a method employed by followers of technical analysis?

A) charting

B) relative strength analysis

C) earnings forecasting

D) trading around support and resistance levels

45) Choosing stocks by searching for predictable patterns in stock prices is called ________.

A) fundamental analysis

B) technical analysis

C) index management

D) random-walk investing

46) Even if the markets are efficient, professional portfolio management is still important because it

provides investors with:

I. Low-cost diversification

II. A portfolio with a specified risk level

III. Better risk-adjusted returns than an index

A) I only

B) I and II only

C) II and III only

D) I, II, and III

47) Suppose you buy 100 shares of Abolishing Dividend Corporation at the beginning of year 1 for $80.

Abolishing Dividend Corporation pays no dividends. The stock price at the end of year 1 is $100, $120 at

the end of year 2, and $150 at the end of year 3. The stock price declines to $100 at the end of year 4, and

you sell your 100 shares. For the four years, your geometric average return is

A) 0.0%.

B) 1.0%.

C) 5.7%.

D) 9.2%.

E) 34.5%.

48) You want to evaluate three mutual funds using the Sharpe measure for performance evaluation. The

risk-free return during the sample period is 6%. The average returns, standard deviations, and betas for the

three funds are given below, as are the data for the S&P 500 Index.

Average Return Standard Deviation Beta

Fund A 24 % 30 % 1.5

Fund B 12 % 10 % 0.5

Fund C 22 % 20 % 1.0

S&P 500 18 % 16 % 1.0

The fund with the highest Sharpe measure is

A) Fund A.

B) Fund B.

C) Fund C.

D) Funds A and B (tied for highest).

E) Funds A and C (tied for highest).

49) Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of

year 1 for $36. At the end of year 1, you receive a $2 dividend and buy one more share for $30. At the end

of year 2, you receive total dividends of $4 (i.e., $2 for each share) and sell the shares for $36.45 each. The

time-weighted return on your investment is

A) -1.75%.

B) 4.08%.

C) 6.74%.

D) 11.46%.

E) 12.35%.

50) Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1

for $50. At the end of year 1, you receive a $1 dividend and buy one more share for $72. At the end of year

2, you receive total dividends of $2 (i.e., $1 for each share) and sell the shares for $67.20 each. The dollar-

weighted return on your investment is

A) 10.00%.

B) 8.78%.

C) 19.71%.

D) 20.36%.

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