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WorksheetsFirst Exam Investment and Portfolio Management
Total questions: 70
Worksheet time: 35mins
Under the strong form of efficiency stock prices are assumed to reflect any information that may be contained in the past history of the stock prices.
True
False
The income objectives differ from stability of principal in that; there is no specific prescription against declines in principal values.
True
False
Arbitrage Price Theory was proposed by Stephen S. Rose and presented in his article ‘The arbitrage theory of Capital Asset Pricing’, published in Journal of Economic Theory in1976.
True
False
Market efficiency means that the price which investor is paying for financial asset (stock, bond, other security) partially reflects fair or true information about the intrinsic value of this specific asset or fairly describes the value of the company, the issuer of this security.
True
False
Capital market is efficient, if the prices of securities which are traded in the market react to the changes of situation immediately, fully and credibly reflect all the important information about the security’s future income and risk-related with generating this income.
True
False
Which one of the following types of securities has no priority in a bankruptcy proceeding?
Convertible bond
Senior debt
Common stock
Preferred stock
Straight bond
What is the market called that allows shareholders to resell their shares to other investors?
Primary
Proxy
Secondary
Inside
Initial
Which statement about common stockholders is incorrect?
Common stockholders have a residual claim on the firm’s cash flows.
Common stockholders have first claim on the firm’s assets during bankruptcy
Common stockholders have a voting right.
Common stockholders are the ultimate owners of a corporation.
A key difference between saving and investing is
Saving is for everyone, investing is for the wealthy
Your money is insured when investing, it is not in savings
Investing has a guaranteed return, savings does not
Saving is for emergencies & goals, investing is for long-term wealth
Why is it important to start investing as soon as possible?
You take less risk when you are young, so money will be safe
You have more time for your money to compound
Investing is an easy way to make quick money
Fees on investments are cheaper when you are younger
Generally, how is risk related to return?
the lower the risk, the greater the possibility of a high return
the greater the risk, the greater the possibility of a high return
the greater the risk, the greater the possibility of a low return
risk and return have no relationship
A single share of ownership of a company is called a:
Bond
Mutual Fund
Annuity
Stock
Stocks are low risk investments options.
True
False
Below are all types of return except:
Actual return
Expected return
Possible return
Required return
If employees of a company go on strike, this is an example of which types of investment risk?
company risk
industry risk
political risk
inflation risk
Ahmad is considering investing in stocks. Which is the less risky investment?
Stock A: SD = 10%; E(R) = 10%
Stock B: SD = 6%; E(R) = 10%
Stock C: SD = 8%; E(R) = 12%
Stock D: SD = 20%; E(R) = 24%
Investment A has an expected return of 15% per year, while Investment B has an expected return of 12% per year. A rational investor will choose
Investment A because of the higher expected return.
Investment B because a lower return means lower risk.
Investment A if A and B are of equal risk.
Investment A only if the standard deviation of returns for A is higher than the standard deviation of returns for B.
Of the following different types of securities, which is typically considered most risky?
long-term corporate bonds
long-term government bonds
common stocks of large companies
common stocks of small companies
You are considering investing in Ford Motor Company. Which of the following are examples of diversifiable risk?
I. Risk resulting from possibility of a stock market crash.
II. Risk resulting from uncertainty regarding a possible strike against Ford.
III. Risk resulting from an expensive recall of a Ford product.
IV. Risk resulting from interest rates decreasing.
I only
I and IV
I, II, III, IV
II, III
The capital asset pricing model
provides a risk-return trade-off in which risk is measured in terms of the market volatility.
provides a risk-return trade-off in which risk is measured in terms of beta.
measures risk as the coefficient of variation between security and market rates of return.
depicts the total risk of a security.
If the beta for stock A equals zero, then
stock A's required return is equal to the required return on the market portfolio.
stock A's required return is equal to the risk-free rate of return.
stock A has a guaranteed return.
stock A's required return is greater than the required return on the market portfolio.
The excess return required from a risky asset over that required from a risk-free asset is called the:
risk premium.
geometric premium.
excess return.
average return.
variance.
The average squared difference between the actual return and the average return is called the:
volatility return.
variance.
standard deviation.
risk premium.
excess return.
The capital gains yield plus the dividend yield on a security is called the:
variance of returns.
geometric return.
average period return.
current yield.
total return.
A capital gain occurs when:
the selling price is less than the purchase price.
the purchase price is less than the selling price.
there is no dividend paid.
there is no income component of return.
never, as they cannot exist.
Income received from the investment during the period in which the investment is held.
Total return
Yield
Variance
Variation
The sum of current income and the capital earned on investment over a specified period of time.
Total return
Expected return
Geometric mean
Arithmetic mean
The total return earned from holding an investment for a specified holding period.
Realized Return
Expected Return
Holding Period Return
Holding Period Yield
Investor A invested in stock XYZ with initial amount of 100 millions VND for 5 years.
Holding period return for each year: 30%, 15%, 10%, 20%, 50%. What is the arithmetic mean return?
20%
25%
30%
None of them
Investor A receives 15%/year nominal return on certificates of deposit. Given that inflation rate is 3%, what will the real return of this investment?
10.84%
11.65%
12.76%
None of them
Investor A receives 15%/year nominal return on certificates of deposit. Given that inflation rate is 3%, what will the real return of this investment?
10.84%
11.65%
12.76%
None of them
•Investor invests $1000 to buy stock A. There are 2 possible outcomes with future return of stock A:
Scenario 1: Probability 60%, return: 80%
Scenario 2: Probability: 40%, return: 20%
What is expected return of stock A?
32%
48%
56%
64%
The 3 - month rate of return is 3%. What is annual percentage rate of return?
9%
12%
12.6%
14.8%
If you want to estimate expected return based on historical data, which return should be used?
Geometric mean return
Annualized rate of return
Arithmetic mean return
This formula is used to calculate:
σ2=i=1∑npi×⌊Ri−E(R)⌋2
Standard deviation based on historical data
Variance based on historical data
Standard deviation based on expected data
Variance based on expected data
If inflation rate is positive number, what is the relationship between nominal return and real return?
Nominal return < real return
Nominal return > real return
Nominal return = Real return
How to calculate current yield of a bond
Annual Coupon/ Face value
Annual Coupon/ Market price
Internal rate of return (IRR) is the rate which equalize
Face value versus present value of future cash flow
Market value versus present value of future cash flow
Inflation can be managed with the help of
Savings
Investment
Consumption
None of these
"•Is a required rate of return on a fixed-income security that has no risk in an economic environment of zero inflation. "
Above statement refer to which type of interest rate?
Nominal rate of interest
Real risk-free rate of interest
Real rate of interest
Purchasing power of interest
What is NOMINAL RATE OF INTEREST?
Is a required rate of return on a fixed-income security that has no risk in an economic environment of zero inflation.
It tell how much more purchasing power we have.
It is equal to sum of real risk-free rate interest plus compensation for taking different types of risk and several risk premiums.
It is cost of money when government issues the securities
In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is
unique risk.
beta.
standard deviation of returns.
variance of returns.
The market portfolio has a beta of
0
1
–1
0.5
The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.2 is equal to
(a)
The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.25 is equal to
0.142
0.144
0.153
0.134
Which statement is not true regarding the market portfolio?
It includes all publicly-traded financial assets.
It lies on the efficient frontier.
It is the tangency point between the capital market line and the indifference curve.
All securities in the market portfolio are held in proportion to their market values.
Which statement is not true regarding the capital market line (CML)?
The CML is the line from the risk-free rate through the market portfolio.
The CML is the best attainable capital allocation line.
The CML is also called the security market line.
The CML always has a positive slope.
A stock's beta measures the:
average return on the stock
sensitivity of the stock's returns to those of the market portfolio
difference between the return on the stock and the return on the market portfolio
market risk premium on the stock
A project has a beta of 1.24, the risk-free rate is 3.8%, and the market rate of return is 9.2%. What is the project's expected rate of return?
15.21%
11.41%
10.50%
14.61%
Which one of these statements is correct?
Betas can be measured exactly.
If a stock has a very low beta, it is likely to have a high beta in the future
The expected future risk premium is easy to accurately determine
CAPM is widely used as a means of estimating expected returns
What would you recommend to an investor who is considering an investment that plots below the security market line?
Invest; The expected return is high relative to the risk
Don't invest; The risk is high relative to the expected return
Invest; All stocks revert to the SML over time
Don't invest; All stocks below the SML are low-growth stocks
Common size analysis is also known as ———————— analysis
Vertical Analysis
Horizontal Analysis
The financial statements of a business enterprise include:
_________________
Balance sheet
Statement of Profit and loss
Cash flow statement
All the above
Financial analysis is used only by the creditors.
True
False
State whether each of the following is True or False
In a Common size statement each item is expressed as a percentage of some common base.
True
False
State whether each of the following is True or False :
Statement of profit and loss account shows the operating performance of an enterprise for a period of time.
False
True
A loss of $X hurts more than a gain of $X benefits
-money means more to you when you have less of it
Risk premium
Essence of risk aversion
A risk neutral person
Risk aversion
A risk averse person would require compensation called a risk premium before accepting a gamble
Risk premium
A risk neutral person
Essence of risk aversion
Risk aversion
Effective way of describing the cost of uncertainty and total cost of risk
--The premium is the point on the curve where the distance in utility between the risk outcomes is equal → risk aversion
True
False
