Deck 15: Revision of the Equity Portfolio

Question 1

A strategy of passive management is one in which, once established, the portfolio is

A) readjusted on a regular basis
B) largely left alone
C) readjusted at the manager's discretion
D) only readjusted if prices decline

Answer 1

largely left alone

Question 2

Naive strategies

A) should never be used
B) are not necessarily bad ones
C) are only appropriate with small portfolios of stock
D) are seldom in the investor's best interest

Answer 2

are not necessarily bad ones

Question 3

Which of the following is a naive strategy?

A) Constant beta
B) Constant proportion
C) Laddered portfolio
D) Buy and hold

Answer 3

Buy and hold

Question 4

Common methods of stock portfolio rebalancing include all of the following EXCEPT

A) maintaining a constant price earnings ratio
B) maintaining a constant beta
C) indexing
D) maintaining a constant proportion

Question 5

Many investors try to avoid

A) blue chip stocks
B) odd lots
C) no-load mutual funds
D) stocks with no beta

Question 6

The purchase of odd lots sometimes involves

A) added risk
B) a slightly higher commission cost
C) a tax disincentive
D) slightly lower dividends

Question 7

Round lots are especially important to the

A) bond investor
B) short-term investor
C) option user
D) speculator

Question 8

A portfolio revision strategy that makes use of a "multiplier" is

A) constant mix
B) constant proportion portfolio insurance
C) dollar cost averaging
D) constant beta

Question 9

A portfolio has a floor value of $4 million, a market value of $7 million, and a multiplier of 1.5. The investment in stock should be

A) $2 million
B) $2.5 million
C) $4.5 million
D) $6 million

Question 10

A portfolio has a floor value of $4 million, a market value of $7 million, and a multiplier of 1.5. The portfolio will be 100% invested in stock when the portfolio value is

A) $12 million
B) $14 million
C) $16 million
D) $18 million

Question 11

Which of the following statements is most accurate?

A) A CPPI strategy sells stock as it rises
B) A CPPI strategy fares best in a declining market
C) Market volatility does not help a CPPI strategy
D) A CPPI strategy also must maintain a constant mix

Question 12

A portfolio has a floor value of $4 million, a market value of $7 million, and a multiplier of 1.5. The portfolio will be 100% invested in bonds when the portfolio value is

A) $12 million
B) $10 million
C) $8 million
D) $4 million

Question 13

A constant mix strategy does best in a _____ market.

A) volatile
B) declining
C) rising
D) flat

Question 14

When stocks outperform bonds, rebalancing a portfolio with a constant mix strategy containing stocks and bonds requires

A) buying stocks and selling bonds
B) buying bonds and selling stocks
C) buying stocks and bonds
D) selling stocks and bonds

Question 15

Comparing a constant mix strategy and a CPPI strategy, in a rising market

A) both the constant mix and CPPI strategy buy stocks
B) both the constant mix and CPPI strategy sell stocks
C) the constant mix strategy sells stock while the CPPI strategy buys stock
D) the constant mix strategy buys stock while the CPPI strategy sells stock

Question 16

A constant mix strategy for portfolio rebalancing means

A) constantly changing the mix between stocks and bonds to time the market
B) constantly changing the individual stocks contained in the equity asset allocation category
C) maintaining the same relative weighting of asset categories
D) increasing or decreasing the amount of funds in a portfolio depending on the expected return

Question 17

Suppose you are managing a $1,000,000 portfolio of stocks and bonds with a constant mix strategy of 50% stocks and 50% bonds. If the stock market increases 20% and the bond market increases 10%, rebalancing would require

A) selling $25,000 in stocks and buying $25,000 in bonds
B) selling $25,000 in bonds and buying $25,000 in stocks
C) selling $50,000 in stocks and buying $50,000 in bonds
D) selling $50,000 in bonds and buying $50,000 in stocks

Question 18

A CPPI portfolio has a floor value of $4 million in stocks, a market value of $7 million, and a multiplier of 1.5. If the value of the portfolio increases 20%, the investment in stocks should be

A) $4.4 million
B) $4.8 million
C) $5.4 million
D) $6.6 million

Question 19

A CPPI portfolio has a floor value of $4 million in stocks, a market value of $7 million, and a multiplier of 1.5. If stocks increase by 20% and bonds increase by 12%, rebalancing requires buying $900,000 in stocks and selling $900,000 in bonds

A) buying $900,000 in bonds and selling $900,000 in stocks
B) buying $1,200,000 in stocks and selling $1,200,000 in bonds
C) no action because a CPPI portfolio is passively managed

Question 20

A stock portfolio designed to mimic a market index but with fewer stocks will likely have less tracking error if it has a

A) beta of 1 and a high R²
B) beta of 1 and a low R²
C) beta of 0 and a high R²
D) beta of 0 and a low R²

Question 21

Which of the following would increase the portfolio beta?

A) Selling stocks with low unsystematic risk and buying stocks with high unsystematic risk
B) Selling Treasury Bills in the portfolio and buying stocks with low systematic risk
C) Selling stocks with high systematic risk and buying stocks with low systematic risk
D) Shifting new funds to the portfolio and buying stocks with low systematic risk

Question 22

Successful implementation of which of the following is inconsistent with the efficient market hypothesis?

A) Short selling
B) Stock lending
C) Certificateless trading
D) Tactical asset allocation

Question 23

The hardest part of a tactical asset allocation strategy is

A) asset class appraisal
B) product class shifting
C) determining covariances
D) determining the swing component

Question 24

Investment strategies are commonly grouped into all of the following categories EXCEPT

A) anticipatory
B) reactive
C) static
D) variable

Question 25

The ideal investment strategy is

A) anticipatory
B) reactive
C) static
D) variable

Question 26

The key element of tactical asset allocation is

A) duration matching
B) properly investing the swing component
C) dollar cost averaging
D) immunization

Question 27

Dollar cost averaging involves _____ investments over time.

A) declining
B) constant
C) rising
D) proportional

Question 28

Largely cosmetic changes that are made to a portfolio near the end of a reporting period are called

A) churning the cheese
B) Bait and Switch (B/S) reporting
C) padding the scorecard
D) window dressing