Download File ch21 Type: Multiple Choice 1. Which of the following is NOT one

File ch21
Type: Multiple Choice
1. Which of the following is NOT one of the portfolio management steps outlined by Maginn
and Tuttle?
a) Objectives important to the investor.
b) Expectations for economic, political, and social changes affecting society, sectors and
individual companies.
c) Identification of expenditure patterns that help the investor meet his objectives.
d) Compare portfolio performance on a regular basis.
Ans: C
EASY
Response: The Maginn and Tuttle model does not include any recommendations on how to
spend the money generated by the investment process. Section: Portfolio Management as a
Process.
2. Which of the following is NOT an important difference between individual and institutional
investors?
a) Individuals have preferences; institutions have constraints.
b) Individuals define risk as “losing money”; institutions define risk as the standard deviation.
c) Individuals have different personalities; the institutions consider the overall characteristics of
the beneficiaries.
d) Individuals are often subject to income taxes; institutions generally are not.
Ans: A
EASY
Response: Section: Portfolio Management as a Process.
3. Which of the following is NOT a special need for information for individual investors?
a) Capital gains are taxed differently than ordinary income.
b) The popular press often highlights funds or stocks that have recently done well.
c) Much investment information is oriented to institutional investors.
d) Life-cycle funds become more conservative as the investor ages.
Ans: C
EASY
Response: Section: Portfolio Management as a Process.
4. Which of the following is the best description of the objective of portfolio management?
a) Maximizing return.
b) Minimizing risk.
c) Choosing an appropriate balance of risk and reward.
d) Avoiding any risk.
Ans: C
EASY
Response: Section: Portfolio Management as a Process.
5. Which of the following is NOT an appropriate investment objective for the individual
situation cited?
a) A young, single person can assume relatively large risks.
b) A middle-aged parent needs to accumulate funds for college and retirement, so he seeks safer,
less lucrative investments.
c) A person approaching retirement finds he has little or no retirement assets, so he shifts into
riskier investments to build up retirement assets.
d) A retired person needs to stretch limited funds for a long life, so he needs very safe
investments.
Ans: C
EASY
Response: The text suggests that younger investors should take more risks, reducing risk as they
move through middle age to retirement. Section: Formulate an Appropriate Investment Strategy.
6. Which is the largest loss can an investor can reasonably expect over a two or three year period
for a highly diversified portfolio, such as the S&P 500?
a) No loss. Every down year is followed by an up year.
b) 10%. The investor will still have 90% of his investment.
c) 20%. The long run standard deviation of the S&P 500 is about 20%.
d) 40%. The bear markets of 1973-4 and 2000-2 both resulted in losses of about 40%.
Ans: D
EASY
Response: Section: Determine and Quantify Capital Market Expectations.
7. Which of the following rates of inflation is appropriate to consider for a long term investor?
a) Zero – inflation has been very low in recent years.
b) 3% - the average inflation over the past 80 years, which will cut the value of a dollar in half
in 25 years.
c) 7.5% - the rate of inflation in the 1970’s.
d) 13% - the rate of inflation in the 1979-80, the most recent inflationary problem
Ans: B
MEDIUM
Response: A good financial plan can be adjusted for different inflation expectations. Section:
Determine and Quantify Capital Market Expectations.
8.Which of the following is NOT part of the process of ongoing portfolio management?
a) Capital markets expectations for the economy, industries and sectors.
b) Portfolio performance is measured.
c) The portfolio is rebalanced as necessary.
d) Assuming additional risk to compensate for previous investment losses.
Ans: D
EASY
Response: Section: Portfolio Management as a Process.
9. Which of the following is NOT a consideration that affects only institutional investors?
a) ERISA regulations affect pension plans.
b) Investors may have to pay large capital gains taxes.
c) The “Prudent Man Rule” controls investment decisions.
d) An institution may have an infinite time horizon
Ans: B
MEDIUM
Response: Section: Developing and Implementing Investment Strategies.
10. Which of the following is NOT one of the issues included in investment strategies?
a) Asset allocation
b) Portfolio diversification
c) Investment objectives
d) Tax consideration
Ans: C
EASY
Response: Investment objectives should be determined before investment strategies are
considered. Section: Developing and Implementing Investment Strategies.
11. Example 21-6 discusses the implication of the large increases in the S&P 500 during 1995
and 1996. After reading this, which of the following would have been the most likely average
return for the 5-year period 1997- 2001?
a) small, less than 10%
b) moderate, between 10% and 20%
c) large, between 20% and 30%
d) very large, over 30%
Ans: A
EASY
Response: The implication of “revert to the mean” is that periods of exceptionally large returns
are followed by significantly lower returns. Actually, the returns on the S&P 500 Section:
Developing and Implementing Investment Strategies.
12. Table 21-1 shows the probabilities of earning at least a specified compound return, over the
long run. What is the probability of earning at least 10.5%?
a) 0%
b) 25%
c) 50%
d) 67%
Ans: C
EASY
Response: Section: Developing and Implementing Investment Strategies.
13. Which of the following is NOT included in the implementation of investing strategies?
a) Asset allocation
b) Portfolio optimization
c) Security selection
d) Tax considerations
Ans: D
EASY
Response: Tax considerations are included in the prior step, selecting investment strategies.
Section: Developing and Implementing Investment Strategies.
14. A portfolio consisting of 50% guaranteed, 10% fixed income, 10% real estate, 30% equities,
would be most appropriate for which type of investor?
a) very aggressive
b) moderate
c) somewhat aggressive
d) conservative
Ans: D
MEDIUM
Response: Section: The Asset Allocation Decision.
15. Which of the following is NOT a factor to consider in determining asset allocation?
a) The investor’s return requirements.
b) The investor’s risk tolerance.
c) The investor’s investment strategy.
d) The investor’s time horizon.
Ans: C
EASY
Response: Section: The Asset Allocation Decision.
16. Which of the following is an example of asset allocation following the life-cycle theory?
a) Older investors become more risk-averse.
b) Older investors become less risk-averse.
c) Young, single investors are more risk-averse.
d) Age or life stage makes no difference to asset allocation.
Ans: D
EASY
Response: Section: Life-Cycle Funds.
17. Which of the following is the best description of the difference between strategic and tactical
asset allocation?
a) Strategic allocation is done only once at the start; tactical allocation is done every day.
b) Strategic allocation is done every few years; tactical allocation is done routinely.
c) Strategic allocation must be done by a professional; tactical allocation can also be done by
individual investors.
d) Strategic allocation is done in response to changing market conditions; tactical allocation is
done in response to change in the investor’s conditions and preferences.
Ans: B
HARD
Response: Section: The Asset Allocation Decision.
18. Which of the following is NOT a change in investor’s circumstance that may require a
review of portfolio policies?
a) A change in wealth.
b) A change in liquidity requirements.
c) A changes in interest rates.
d) A change in tax circumstances.
Ans: C
EASY
Response: Interest rates should be monitored, but are not specific to investors. Section: Monitor
Market Conditions and Investor Circumstances.
19. Which of the following is least likely to require a portfolio rebalancing?
a) A change in market conditions, such as interest rates.
b) A change in tax circumstance, such as the change in tax status of dividends.
c) A change in the prospects of individual company prospects.
d) A change in the relative risk aversion of the individual.
Ans: D
MEDIUM
Response: When the investor gains (loses) wealth, he may accept (reject) market risks, but the
risk aversion relative to wealth is unlikely to change, especially in the short or medium term.
Section: Rebalancing the Portfolio.
20. Which of the following is a possible disadvantage of rebalancing a portfolio?
a) Taxable accounts pay capital gains tax when holdings are sold.
b) Some assets will grow in value faster than others.
c) The asset allocation may move away from the plan.
d) The risk-adjusted expected return of specific assets may change.
Ans: A
EASY
Response: Section: Rebalancing the Portfolio.
Type: True False
1. Portfolio management is best considered as a process.
Ans: True
Response: Section: Portfolio Management as a Process.
2. Once an optimum portfolio has been designed to meet the investor’s specific needs, it can
stay in place for many years.
Ans: False
Response: Portfolio management is an ongoing process. Section: Portfolio Management as a
Process.
3. Individual investors have similar attitude toward risk as institutional investors.
Ans: False
Response: Although the investment policies of institutions are set up by people, the text details
how individuals define risk as “losing money,” but institutions use more sophisticated
definitions. Section: Formulate an Appropriate Investment Strategy.
4. The life-cycle approach to risk return/reward choices means that younger, risk-averse
investors should choose riskier portfolios to increase their return.
Ans: False
Response: Each investor has his own level of risk aversion. If an investor is uncomfortable with
all funds in stocks, other portfolios may be more appropriate. Section: Life-Cycle Funds.
5. Individual investors can have very specific time horizons, for example retirement.
Ans: True
Response: The individual can plan to have a certain amount to start retirement. Then the
investor will need to plan to make these funds last his lifetime. Section: Formulate an
Appropriate Investment Strategy.
6. As a starting assumption, we can assume that major assets will continue to have similar
average returns and standard deviations, as they have had over the past several years.
Ans: True
Response: We can start with historical returns, and perhaps adjust for macro and micro
expectations. Section: Determine and Quantify Capital Market Expectations.
7. The probabilities presented in Table 21-1 confirm the popular assertion that buying and
holding well-diversified common stocks for a long period is an excellent way to earn at least
10.5%.
Ans: False
Response: The probability of earning 10.5% or more actually decreases as the holding period
increases. Section: Determine and Quantify Capital Market Expectations.
8. Asset allocation is the most important investment decision.
Ans: True
Response: Asset allocation represents 98 percent of the returns. Section: The Asset Allocation
Decision.
9. Following the bottom that was reached in the stock market in August 1982, the S&P 500
Composite Index showed a compound annual average return of approximately 18.5 percent a
year for the years 1982-1999.
Ans: True
Response: Section: Determine and Quantify Capital Market Expectations.
10. Portfolios should be examined, and possibly rebalanced, at least annually.
Ans: True
Response: While we must consider the transaction costs of selling and buying securities against
the benefits of rebalancing, an annual review is probably appropriate for most individuals.
Section: Rebalancing the Portfolio.