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Chapter 7

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User has deleted their subject information Quiz on Chapter 7, created by Deleted user on 03/09/2021.
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Dale Doust
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Dale Doust
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Question 1

Question
Portfolio performance is:
Answer
  • rarely measured in absolute terms, mostly measured in relative terms
  • rarely measured in relative terms, mostly measured in absolute terms
  • only ever measured in relative terms
  • only ever measured in absolute terms

Question 2

Question
Which of the following is a limitation rather than an assumption of the Capital Asset Pricing Model?
Answer
  • Investors are rational and risk averse
  • Investors hold a well-diversified portfolio
  • Investors make investment decisions based on mean variance analysis
  • Investors are rewarded for more than just their exposure to systemic risk

Question 3

Question
An investor allowed the principle of 'regret aversion' to influence his actions. This resulted in him:
Answer
  • declining to buy a stock based purely on a previous bad experience
  • B buying a badly performing stock from a friend as recompense for recommending it in the first place
  • holding a poorly performing stock for an irrationally long period
  • only selling stock once a specified loss threshold had been reached

Question 4

Question
Why is a time weighted return (TWR) preferred to a money weighted return (MWR) when evaluating performance?
Answer
  • TWR only requires portfolio values at the start and end of the investment period along with dates and size of each cash flow
  • TWR eliminates the timing effect of cash flows into and out of the fund
  • TWR measures the fund growth resulting from both the underlying performance of the portfolio and the size and timing of cash flows into and out of the fund
  • TWR calculates the risk adjusted return per unit of risk

Question 5

Question
Four bond portfolios each hold a variety of stock. Which one of them is BEST described as operating a barbell strategy?
Answer
  • Portfolio A, which consists solely of bills maturing in one year plus bonds maturing in 25 and 30 years
  • Portfolio B, which consists solely of bills maturing in six months plus bonds maturing in 5, 10, 15 and 20 years
  • Portfolio C, which consists solely of bonds maturing in 1, 3 and 5 years
  • Portfolio D, which consists solely of bonds maturing in 20, 25 and 30 years

Question 6

Question
Why do portfolios need a regular annual or periodic review?
Answer
  • To ensure that all assets are priced on a regular basis
  • To ensure that all assets are reconciled against the market
  • To ensure that all cash balances are reconciled against the actual bank
  • To ensure the portfolio still meets the client's objectives and is positioned correctly given the market conditions

Question 7

Question
The excess return of a portfolio or security above that of the risk adjusted benchmark is known as:
Answer
  • alpha
  • beta
  • duration
  • premium

Question 8

Question
An investment manager believes that markets are inefficient and that he can obtain abnormal returns after transaction charges. Which investment style is he most likely to adopt?
Answer
  • Passive
  • Indexation
  • Active
  • Satellite

Question 9

Question
An individual has been advised to invest in some shares by a friend. He wants to make sure that he invests in companies which do not have a volatile share price. To achieve this he should select shares which have a beta factor of:
Answer
  • 1
  • 1.25
  • 1.5
  • 1.75

Question 10

Question
Which of the following is a feature in Arbitrage Pricing Theory (APT)?
Answer
  • APT relies on identified factors being correlated
  • The variables of APT include real economic factors
  • The principal component of APT is the return on an index of all shares
  • APT is equivalent to a single factor Capital Asset Pricing Model

Question 11

Question
Based on the principles of Modern Portfolio theory, an equity fund will operate on the 'efficient frontier' if:
Answer
  • the optimum level of systematic risk is obtained
  • the best level of diversification is achieved
  • the fund's alpha value is negative
  • the fund's beta value is one or more

Question 12

Question
Bond portfolio X exclusively contains relatively long-dated stock whereas Bond portfolio Y operates a laddering strategy. This means that Bond X is likely to:
Answer
  • generate higher yields
  • present less of a credit risk
  • be more sensitive to interest rate changes
  • represent a more diversified approach

Question 13

Question
In which country can shareholders be assured that listed companies will comply with the OECD Principles for Corporate Governance?
Answer
  • France
  • Germany
  • UK
  • USA

Question 14

Question
An investor has a requirement for an 8% return and is considering choosing Stock X to satisfy this need. Based on the Capital Asset Pricing Model, if the beta value of this stock is recalibrated from 1.2 to 1.3, this would:
Answer
  • increase the likelihood that the stock would be suitable
  • decrease the likelihood that the stock would be suitable
  • automatically trigger an increase in the investor's required rate
  • automatically trigger a decrease in the investor's required rate

Question 15

Question
Using Modern Portfolio Theory to create a two stock portfolio, which of the following is TRUE?
Answer
  • The lower the correlation of stock returns, the greater the portfolio's diversification
  • The higher the correlation of stock returns, the greater the portfolio's diversification
  • The higher the correlation of stock returns, the lower the level of total risk associated with any given level of expected return
  • The lower the correlation of stock returns, the higher the level of total risk associated with any given level of expected return

Question 16

Question
Which of the following does a passive investment manager principally invest in?
Answer
  • Equities
  • An index
  • Fixed income
  • Other institutional funds
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