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CHAPTER 9 INVESTMENT MANAGEMENT: CONCEPTS AND STRATEGIES
Chapter 9
MULTIPLE CHOICE QUESTIONS
Question 1. Joe Turner purchased a bond. As a result of an increase/decrease in market interest
rates, the price of this bond falls/rises. This is an example of which type of risk?
A.
B.
C.
D.
E.
Interest rate
Market
Inflation
Liquidity
A and C
Question 2. If the interest rates rise, which of the following will be true?
A. The 15-year bond price will decline more than the 30-year bond price
B. The price of the 10-year bond will rise while the price of the 15-year bond will
decline
C. The prices of different bonds will move in a different way
D. None of the above
Question 3. The longer an investor parts with her funds, the more uncertain she is about the
prospect of realizing a capital loss. This statement refers to ________ risk?
A.
B.
C.
D.
E.
default
liquidity
market
maturity
liability
Question 4. Laddering will help you achieve all these goals except:
A.
B.
C.
D.
Purchase at prevailing market rates
Diversify your portfolio
Protect yourself from market downturn
Decrease portfolio volatility
Question 5. All of the following can be classified as risk reduction strategies for bond
purchasing except:
A.
B.
C.
D.
Buying both domestic and international bonds
Investing in tax-exempt bonds
Investing in taxable bonds
Using dollar cost averaging strategy
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CHAPTER 9 INVESTMENT MANAGEMENT: CONCEPTS AND STRATEGIES
Question 6. If you have purchased 100 shares of ABC stock at $8 per share, and a year later the
price of the stock was $12 per share, what would be your capital appreciation rate for the first
quarter of the year?
A.
B.
C.
D.
25%
50%
100%
unable to determine
Question 7. You have purchased a 30-year bond with a coupon of 7%. If you hold it to maturity,
your annual return would be:
A.
B.
C.
D.
7.25%
7%
less than 7%
none of the above
Question 8. When purchasing common stock, an investor assumes:
A.
B.
C.
D.
E.
market/diversifiable or non-market/undiversifiable risk
market/undiversifiable or non-market/diversifiable risk
non-market/diversifiable or market/diversifiable risk
market risk
B and D
Question 9. Market risk refers to all of the following except:
A.
B.
C.
D.
recessions
changes in company’s management
political developments
investor psychology
Question 10. To deal with undiversifiable risk you could:
A.
B.
C.
D.
require higher returns from investments with higher risks
require lower returns from investments with higher risks
require higher returns from investments with lower risks
none of the above
Question 11. The Beta of the stock is 0.89. You can come to conclusion that:
A.
B.
C.
D.
this is a low risk stock
the stock usually fluctuates less than S&P 500
sudden sharp movements of Dow Jones Industrial Average will not affect the stock
in advancing market, this is a good investment choice
Question 12. The key measures of risk are all of these except:
A.
B.
C.
D.
Alpha
Beta
Delta
Standard deviation
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CHAPTER 9 INVESTMENT MANAGEMENT: CONCEPTS AND STRATEGIES
Question 13. Which of the following statements is true?
A.
B.
C.
D.
E.
A beta measures the volatility of a security return compared to the market
A beta of 1 indicates that the stock is more volatile than the market
A portfolio of stocks cannot be assigned a beta
Stocks with a beta lower than one would likely have a higher expected return
A and D
Question 14. The three methods of taxing mutual fund gains are:
A. Average Cost Method, FIFO Method, and LIFO Method
B. FIFO Method, LIFO Method and Specific Identification Method
C. Average Cost Method, Minimum Balance Method, and Specific Identification
Method
D. FIFO Method, Average Cost Method, and Specific Identification Method
E. FIFO Method, Average Cost Method, and Valuation Method
Question 15. The standard deviation of the stock A is twice as high as the stock B. Which of the
following statements is the most correct?
A.
B.
C.
D.
in bull markets their returns will probably be the same
in bull market stock A will probably produce a higher return
in bear market stock B will probably decline more than stock A
in flat market stock B will probably outperform S&P 500
Question 16. Stock A has a lower Sharpe ratio than stock B. It means that:
A.
B.
C.
D.
historically stock A performed better than stock B
in a bull market stock B performs better than stock A
shareholders of stock A are less exposed to market risk than shareholders of stock B
none of the above
Question 17. Morningstar’s 4-star rating guarantees:
A.
B.
C.
D.
that the fund will outperform the market in the next calendar year
that the investors will gain higher returns if they buy this fund
that the fund will suffer smaller losses than the market in case of the market downturn
none of the above
Question 18. You placed a stop market order. It means that:
A.
B.
C.
D.
you are guaranteed to get out of a stock at the stop price
you are guaranteed to get out of a stock when the stop price is hit
you are not guaranteed to get out of stock
none of the above
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CHAPTER 9 INVESTMENT MANAGEMENT: CONCEPTS AND STRATEGIES
Question 19. You have placed a stop limit order. It means that:
A.
B.
C.
D.
you are guaranteed an execution at the limit price when the stock hits the stop price
you are guaranteed an execution at the stop price when the stock hits the limit price
you are not guaranteed an execution
none of the above
Question 20. All of these are risk management techniques except:
A.
B.
C.
D.
Dollar Cost Averaging
Constant Ratio Plan
Writing Covered Calls
Writing Uncovered Calls
Question 21. Dollar Cost Averaging:
A.
B.
C.
D.
guarantees a profit on your stock sale
reduces the effect of market fluctuations in the long run
prevents a loss on your stock sale
is a good tool for a day trader
Question 22. You are using a Constant Ratio Plan. If the market goes down, you
A.
B.
C.
D.
put more money into the money fund
put more money into the stock fund
put equal amounts of money into each fund
none of the above
Question 23. You write a covered call when you
A.
B.
C.
D.
own the stock
do not own the stock
want to buy the stock
want to sell the stock
Question 24. To determine the cost basis for your mutual fund shares, you can use
A.
B.
C.
D.
Specific Identification Method
First-In, First-Out Method
Average Cost Method
All of the above
Question 25. The best way to minimize tax liability when selling mutual fund shares would be to
A.
B.
C.
D.
calculate cost basis using FIFO approach
calculate cost basis using average cost approach
calculate cost basis using specific identification approach
disregard cost basis
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CHAPTER 9 INVESTMENT MANAGEMENT: CONCEPTS AND STRATEGIES
Question 26.
Question 27. The Modern Portfolio Theory is based upon
A.
B.
C.
D.
Capital Asset Pricing Model
Markowitz Model
Sharpe Ratio
A and B only
Question 28. All of the following are basic assumptions of the CAPM except:
A.
B.
C.
D.
Investors are risk-averse
Investors want to maximize their returns
Investors optimize their portfolios by avoiding risky assets
Investors use diversification
Question 29. None of the following is true except:
A.
B.
C.
D.
To diversify properly you need to buy 20 to 40 securities
To diversify properly you need to buy about 5 securities
You cannot diversify properly, no matter how many securities
You don’t need to diversify if your securities are blue chips
Question 30. We should invest globally for all of the following reasons except:
A.
B.
C.
D.
2/3 of the world’s stock market values are outside of the U.S.
overseas markets may not be correlated with the U.S. markets
it increases our diversification
foreign investments provide higher returns, especially emerging markets
Question 31. The efficient frontier is the curve on which:
A. the least efficient portfolios appear
B. the most efficient portfolios appear
C. both efficient and inefficient portfolios could appear, depending upon the prevailing
market conditions
D. portfolios of only efficient investors could appear
Question 32. Asset Allocation Model users take all of the following steps in constructing a
portfolio except:
A.
B.
C.
D.
determining the investor’s risk tolerance
analyzing the prevailing market conditions
waiting for a temporary market reversal to obtain better pricing
determining allocation of funds among major asset classes
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CHAPTER 9 INVESTMENT MANAGEMENT: CONCEPTS AND STRATEGIES
Question 33. Which of the following statements is not one of the steps in the Asset Allocation
Model?
A.
B.
C.
D.
E.
Short-term direction of interest rates
Asset split
Selection of investment arenas
Percentage assignment to favorite investments
None of the above
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