PM 1.12 Test

Q. The line depicting the total risk and expected return of portfolio combinations of a risk-free asset and any risky asset is the:

• A. security market line.
• B. capital allocation line.
• C. security characteristic line.

An investor purchases one share of stock for $85. Exactly one year later, the company pays a dividend of $2.00 per share. This is followed by two more annual dividends of $2.25 and $2.75 in successive years. Upon receiving the third dividend, the investor sells the share for $100. The money-weighted rate of return on this investment is closest to:

• A. 7.97%.
• B. 8.15%.
• C. 8.63%.

Q. With respect to capital market theory, which of the following statements best describes the effect of the homogeneity assumption? Because all investors have the same economic expectations of future cash flows for all assets, investors will invest in:

• A. the same optimal risky portfolio.
• B. the Standard and Poor’s 500 Index.
• C. assets with the same amount of risk.

Q. Which of the following is least important as a reason for a written investment policy statement (IPS)?

• A. The IPS may be required by regulation.
• B. Having a written IPS is part of best practice for a portfolio manager.
• C. Having a written IPS ensures the client’s risk and return objectives can be achieved.

Q. Two individual investors with different levels of risk aversion will have optimal portfolios that are:

• A. below the capital allocation line.
• B. on the capital allocation line.
• C. above the capital allocation line.

Q. Relative strength analysis typically compares the performance of an asset with that of a benchmark or other security using a:

• A. bar chart that reflects the two assets’ price history.
• B. line chart that reflects the ratio of the two assets’ prices.
• C. candlestick chart that reflects ratios measuring the magnitude of each asset’s up days versus down days.

Q. With respect to the formation of portfolios, which of the following statements is most accurate?

• A. Portfolios affect risk less than returns.
• B. Portfolios affect risk more than returns.
• C. Portfolios affect risk and returns equally.

Q. With respect to the capital asset pricing model, which of the following values of beta for an asset is most likely to have an expected return for the asset that is less than the risk-free rate?

• A. −0.5.
• B. 0.0.
• C. 0.5.

None

• A. endowment.
• B. mental accounting.
• C. framing.

None

• A. 63.10%.
• B. 62.75%.
• C. 63.45%.