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Investment Management Questions

Need help with the following Investment Management Questions:

Question 1.1. The risk of a portfolio consisting of two uncorrelated assets will be (Points : 1)
equal to zero.
greater than the risk of the least risky asset but less than the risk level of the more risky asset.
greater than zero but less than the risk of the more risky asset.
equal to the average of the risk level of the two assets.

Question 2.2. The beta of the market is (Points : 1)
-1.0.
0.0.
1.0.
undefined.

Question 3.3. Portfolio objectives should be established independently of tax considerations. (Points : 1)
True
False

Question 4.4. A stock with a beta of 1.3 is less risky than a stock with a beta of 0.42. (Points : 1)
True
False

Question 5.5. Portfolios located on the efficient frontier are preferable to all other portfolios in the feasible set. (Points : 1)
True
False

Question 6.6. The Capital Asset Pricing Model (CAPM) includes which of the following in its base assumptions?
(Points : 1)
Investors should earn a minimum retun rate equal to the risk-free rate.
Investors in the market should earn a return greater than the return on the overall market.
Investors shoud be awarded for the amount of risk they assume.
Investors should earn a return located above the Security Market Line.

I and III only
II and IV only
I, II and III only
I, III, and IV only

Question 7.7. To obtain the maximum reduction in risk, an investor should combine assets that (Points : 1)
are negatively correlated.
are uncorrelated.
have a correlation coefficient of positive one.
have a correlation coefficient of negative one.

Question 8.8. Standard deviation is a measure that indicates how the price of an individual security responds to market forces. (Points : 1)
True
False

Question 9.9. Traditional portfolio management (Points : 1)
concentrates on only the most recent "hot" sectors of the market.
typically centers on interindustry diversification.
includes only diversified bonds in a laddered portfolio.
is based on statistical measures to develop the portfolio plan.

Question 10.10. Amanda has the following portfolio of assets.
Poporation of
Stock Portfolio Beta
ABC $7,000 .85
DEF $12,000 1.25
GHI $6,000 1.10
What is the beta of Jonathan's portfolio? (Points : 1)
1.06
1.10
1.13
3.02

Question 11.11. A measure of systematic risk (Points : 1)
standard deviation
historical average rate of return
beta
variance

Question 12.12. Diversifiable risk is also called systematic risk. (Points : 1)
True
False

Question 13.13. Studies have shown that investing in different industries as well as different countries reduces portfolio risk. (Points : 1)
True
False

Question 14.14. Which of the following factors comprise the CAPM?
(Points : 1)

I. divendend yield
II. risk-free rate of return
III. the expected rate of return on the market
IV. risk premuim for the firm
I and III only
II and IV only
III and IV only
II, III and IV only

Question 15.15. Security A has a beta of .99, security B has a beta of 1.2, and security C has a beta of -1.0. This information indicates that (Points : 1)
security A has the highest degree of market risk.
security B has 20% more systematic risk than the market.
security C has the highest degree of market risk.
security C would be the best investment if a strong bull market is expected.

Question 16.16. The market rate of return increased by 8% while the rate of return on XYZ stock increased by 4%. The beta of XYZ stock is (Points : 1)
-2.0.
-0.40.
0.50.
2.0.

Question 17.17. A coefficient of determination of 0.6 means that 40% of the variation in a security's return is related to factors other than the security's relationship to the market. (Points : 1)
True
False

Question 18.18. A portfolio that offers the lowest risk for a given level of return is known as an efficient portfolio. (Points : 1)
True
False

Question 19.19. In designing a portfolio, the only relevant risk is (Points : 1)
total risk.
unsystematic risk.
event risk.
nondiversifiable risk.

Question 20.20. The basic theory linking risk and return is the Capital Asset Pricing Model. (Points : 1)
True
False

Question 21.21. A stock's beta value is a measure of (Points : 1)
interest rate risk.
total risk.
systematic risk.
diversifiable risk.

Question 22.22. The investment choice of an individual is affected by
(Points : 1)
I. their tolerance for risk
II. their prior investment experience
III. their marginal tax braket
IV. the stability of their income

II and III only
II, III and IV only
I, III and IV only
I, II, III and IV

Question 23.23. The optimal portfolio for an individual investor is represented by the point that lies on the (Points : 1)
lowest possible utility curve and connects to the efficient frontier.
utility curve which is just tangent to the right side of the feasible set of risk-return options.
utility curve which is just tangent to the efficient frontier.
utility curve which represents the highest possible rate of return within the feasible set of risk-return options.

Question 24.24. Portfolio objectives should be established before beginning to invest. (Points : 1)
True
False

Question 25.25. Market return is the average return on a large sample of stocks such as those in the Standard & Poor's 500 Stock Composite Index. (Points : 1)
True
False

Question 26.26. Risk can be totally eliminated by combining two assets that are perfectly positively correlated. (Points : 1)
True
False

Question 27.27. Historical betas are always reliable predictors of future return fluctuations. (Points : 1)
True
False

Question 28.28. When the Capital Asset Pricing Model is depicted graphically, the result is the (Points : 1)
standard deviation line.
coefficient of variation line.
security market line.
alpha-beta line.

Question 29.29. The best stock to own when the stock market is at a peak and is expected to decline in value is one with a beta of (Points : 1)
+1.5.
+1.0.
-1.0.
-0.5.

Question 30.30. Beta measures diversifiable risk while standard deviation measures systematic risk. (Points : 1)
True
False

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Plz refer to the word doc attached

Question 1.1. The risk of a portfolio consisting of two uncorrelated assets will be (Points : 1)
equal to zero.
greater than the risk of the least risky asset but less than the risk level of the more risky asset.
greater than zero but less than the risk of the more risky asset.
equal to the average of the risk level of the two assets.
The risk is determined by the variance of returns of the combined portfolio
Mathematically
Where P represents the portfolio and A & B the individual assets, σ represents the variance of each asset, w represents the weight (% of total investment). in case of uncorrelated assets the covariance is zero hence it can be rephrased as

Hence the risk will be greater than the risk of the least risky asset but less than the risk level of the more risky asset as the standard deviation of the portfolio will lie between the standard deviations of the individual assets

Question 2.2. The beta of the market is (Points : 1)
-1.0.
0.0.
1.0.
undefined.
The beta of the market is 1 by definition as beta is a measure of the protfolio's volatility w.r.t. the market.
Question 3.3. Portfolio objectives should be established independently of tax considerations. (Points : 1)
True
False
True. Portfolio objectives are to be established independently of tax considerations, which are to be condiered in the next step, the investment strategies to achieve the tax considerations.
Question 4.4. A stock with a beta of 1.3 is less risky than a stock with a beta of 0.42. (Points : 1)
True
False
True. Stock with a beta of 0.42 will be less risky as lower beta indicates lower risk
Question 5.5. Portfolios located on the efficient frontier are preferable to all other portfolios in the feasible set. (Points : 1)
True
False
True. Portfolios located on the efficient frontier have the highest return for any given level of risk.
Question 6.6. The Capital Asset Pricing Model (CAPM) includes which of the following in its base assumptions?
(Points : 1)
Investors should earn a minimum retun rate equal to the risk-free rate.
Investors in the market should earn a return greater than the return on the overall market.
Investors shoud be awarded for the amount of risk they assume.
Investors should earn a return located above the Security Market Line.
I and III only
II and IV only
I, II and III only
I, III, and IV only
I and III only are true.
Question 7.7. To obtain the maximum reduction in risk, an ...

Solution Summary

The solution provides description for 30 multiple choice questions pertaining to application of capital asset pricing model theory of modern portfolio management.

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