Deck 18: Managing the Equity Portfolio

Question 1

Which of the following is most accurate?

A) Over the long run, many portfolio managers fail to outperform a buy-and-hold strategy.
B) A buy-and-hold strategy is expensive to maintain.
C) A buy-and-hold strategy consistently under performs an active strategy.
D) A buy-and-hold strategy is not appropriate for all investors.

Answer 1

Over the long run, many portfolio managers fail to outperform a buy-and-hold strategy.

Question 2

All of the following are traditional portfolio objectives except

A) capital appreciation.
B) stability of principal.
C) minimum risk.
D) income.

Answer 2

minimum risk.

Question 3

A growth of income objective requires

A) tax-free securities.
B) some investment in common stock.
C) no investment in bonds.
D) Investment in convertible bonds.

Answer 3

some investment in common stock.

Question 4

The overriding investment objective is

A) utility maximization.
B) risk minimization.
C) return maximization.
D) income generation.

Question 5

In portfolio formation, a category of investment components is a(n)

A) security universe.
B) efficient frontier.
C) market portfolio.
D) asset class.

Question 6

The long-term return on a portfolio is influenced by

A) asset allocation.
B) the market risk premium.
C) the level of interest rates.
D) all of the above.

Question 7

Periodically adjusting a stock portfolio is called

A) rebalancing.
B) trading up.
C) taking profits.
D) averaging down.

Question 8

A strategy that requires little thinking to implement is a

A) dominated strategy.
B) efficient strategy.
C) naïve strategy.
D) inefficient strategy.

Question 9

The costs of revising a portfolio include all of the following except

A) direct dollar costs.
B) SEC trading limitations.
C) managerial time.
D) image problems.

Question 10

_____ is making unnecessary trades.

A) Churning.
B) Flipping.
C) Averaging up.
D) Day trading.

Question 11

_____refers to largely cosmetic portfolio changes.

A) Window dressing.
B) Rebalancing.
C) Profit taking.
D) Dollar cost averaging.

Question 12

A special case of a constant proportion equity portfolio is

A) constant beta.
B) laddering.
C) indexing.
D) equal weighting.

Question 13

Constant proportion rebalancing requires

A) the sale of winners.
B) the sale of losers
C) an increasing investment in the risk free rate.
D) a decreasing investment in the risk free rate.

Question 14

Other than trading fees, there is a downward bias in the return of an indexed portfolio because of

A) taxes.
B) the presence of cash.
C) commissions.
D) the prohibition against odd lots.

Question 15

Investing a constant dollar amount at regular intervals into the same security is

A) averaging down.
B) dollar cost averaging.
C) a market timing strategy.
D) a form of technical analysis.

Question 16

In determining the average cost per share in a periodic investment program, calculate the

A) arithmetic mean.
B) geometric mean.
C) harmonic mean.
D) inverse arithmetic mean.

Question 17

A covered call means

A) the investor also owns a protective put.
B) the investor is also short the stock.
C) the investor has a paper gain in the underlying stock.
D) the investor is simultaneously long the underlying stock.

Question 18

The principal disadvantage of covered call writing is

A) the opportunity cost if exercise occurs.
B) the substantial commission burden.
C) unfavorable tax treatment.
D) low liquidity in the options market.

Question 19

Writing deep-in-the-money options to buy or sell stock is called

A) index arbitrage.
B) improving on the market.
C) double dipping.
D) a capture the dividend strategy.

Question 20

The greatest downside protection comes from

A) a covered call.
B) being long the stock.
C) writing a put.
D) buying a protective put.

Question 21

With a protective put, the difference between the stock price and the striking price is like

A) a margin requirement.
B) an automobile insurance policy deductible.
C) a down payment.
D) a futures good faith deposit.

Question 22

Calculating the number of index puts to use for downside protection requires

A) the option delta.
B) the option gamma.
C) The option theta.
D) The option premium.

Question 23

The fact that, everything else being equal, a stock index futures contract declines in value over time is

A) a benefit to the bullish speculator.
B) because the market is less risk-averse in the long run.
C) called basis convergence.
D) called reversion to the mean.

Question 24

Which of the following portfolio objectives might which to offset the impact of inflation?

A) stability of principal
B) growth of income
C) capital appreciation
D) both b and c

Question 25

Which of the following statements about an indexed portfolio is not true?

A) The beta of the portfolio is close to 1.
B) There will be no trading involved.
C) The portfolio manager seeks "average" returns.
D) Individual stocks are held proportional to their market value proportion in the index.

Question 26

The least expensive portfolio management strategy, in terms of cash costs, is

A) the minimum variance portfolio
B) the undiversified portfolio
C) the buy and hold portfolio
D) the capital appreciation portfolio

Question 27

Investing a fixed amount at regular intervals is called

A) dollar cost averaging
B) indexing
C) rebalancing
D) a constant proportion portfolio

Question 28

Over the long run, a buy and hold strategy is generally inferior to a managed portfolio.

Question 29

If someone wants no chance of loss with his or her investment, income is the appropriate investment objective.

Question 30

The overriding investment objective is utility maximization.

Question 31

Asset allocation refers to the relative historical performance of stocks, bonds, and cash.

Question 32

An active strategy is also called a naïve strategy.

Question 33

A buy and hold strategy does not require portfolio rebalancing.

Question 34

Most of the stock market's total return comes from dividends rather than capital appreciation.

Question 35

Window dressing is an illegal activity involving security fraud.

Question 36

An equally weighted portfolio is a special case of a constant proportion strategy.

Question 37

Constant proportion rebalancing requires the sale of winners.

Question 38

Beta is usually reported to the third decimal place.

Question 39

Indexing is becoming more popular with portfolio managers.

Question 40

Dollar cost averaging requires the investor to time the market.

Question 41

Over time, lump sum investing seems to outperform dollar cost averaging.

Question 42

Writing call options is a common way of increasing the income generated by a portfolio.

Question 43

Improving on the market involves buying options while also holding the stock.

Question 44

A protective put is a put option with a tax-free premium feature.

Question 45

Buying index puts, like those on the OEX, is an attractive form of portfolio protection.

Question 46

A portfolio manager might buy S&P 500 stock index futures contracts to safeguard a stock portfolio against a market decline.

Question 47

Over the long run, a hedged portfolio usually has a return less than that of an unhedged portfolio.

Question 48

Dollar cost averaging eliminates the need to time the market.

Question 49

The major disadvantage of writing covered call options is the ceiling on possible appreciation of the stock.

Question 50

A protective put position by an investor means that investor with stock sells (writes) put options.

Question 51

A buy and hold strategy is an example of passive portfolio management.

Question 52

A buy and hold strategy is always a bad idea.

Question 53

Portfolio rebalancing using betas is rapidly becoming the dominant portfolio rebalancing technique.