Deck 13: Managing Your Own Portfolio

Question 1

Marti is 31 years old and is saving for retirement. Which one of the following portfolio allocations might best suit her situation if she is willing to accept a fair amount of risk in exchange for long-term capital appreciation?

A) 60% bonds, 15% money funds and 25% real estate
B) 5% money funds, 10% bonds and 85% growth stocks
C) 25% bank CDs, 40% corporate bonds, 15% money market, 20% value stocks
D) 50% mortgage bonds, 5% money market, 45% municipal bonds

Answer 1

B

Question 2

When developing an asset allocation scheme, it is best to weight each type of asset equally.

Answer 2

False

Question 3

Jessica's portfolio consists of 30% common stock, 40% bonds, 15% foreign securities and 15% short-term securities. This asset allocation would be considered

A) aggressive.
B) moderate.
C) conservative.
D) passive.

Answer 3

B

Question 4

The allocation of investments between types of assets (stocks, bonds, short-term securities, etc.) has less effect on a portfolio's return than the choice of securities within asset classes.

Question 5

The Dow Jones Industrial Average (DJIA) includes 500 of the largest companies traded on
U. S. exchanges.

Question 6

The fixed-weightings approach to asset allocation

A) is based on an allocation of an equal percentage of the portfolio to each separate asset category.
B) requires periodic rebalancing of the portfolio to maintain the desired weights.
C) is based on periodic adjustments to category weights in response to market changes.
D) uses stock-index futures and bond futures in a market timing strategy.

Question 7

Tatiana is following a fixed weighting approach to managing her portfolio, which on January 1 consisted of 45% common stock, 40% bonds, and 15% short-term securities. Because stocks had a good year, at the end of the year, it consisted of 55% common stock, 35% bonds and 10% short-term securities. As a result,

A) Tatiana should leave her portfolio as it is to take advantage of momentum in stocks.
B) she should sell stock and buy bonds and short-term securities to restore the original weightings.
C) she should sell stock index futures to protect herself from falling prices.
D) she should sell stock and increase the proportions of bonds and short-term securities because she is now one year older.

Question 8

The investor's overall economic security should an important consideration when allocating assets within a portfolio.

Question 9

Tactical asset allocation is most suitable for

A) young, single individuals with good incomes.
B) retirees.
C) large institutional investors.
D) investors who have already accumulated a fair amount of wealth.

Question 10

Mathew's 401-K plan offers a choice between and S&P 500 Index Fund, a large-cap stock fund, a blue chip stock fund that seeks high dividend income and modest growth, a fund that invests only in investment grade corporate bonds and a fund that that invests only in government bonds. Mathew allocates 20% of his money to each fund. Which of the following statements offers the best critique of Mathew's "1/N" allocation?

A) Mathew may not be as well diversified as he thinks because the three stock funds probably own many of the same stocks.
B) He should have allocated on 1/3 to stocks and 1/3 to each of the remaining funds.
C) His plan does not provide sufficient liquidity.
D) There is nothing wrong with Mathew's plan.

Question 11

Before analyzing needs and objectives, investors should first construct a portfolio.

Question 12

Asset allocation focuses on selecting specific securities within an asset class.

Question 13

Asset allocation should focus on

A) the investor's financial and family situation.
B) selection of individual securities within an asset class.
C) maximization of current income.
D) maximization of short-term profits.

Question 14

A conservative asset allocation would rely heavily on bonds and short-term securities.

Question 15

Utility stocks are often suitable for low-risk, current-income-oriented portfolios.

Question 16

Fixed weightings, flexible weightings, and tactical asset allocation are three approaches to asset allocation. Compare and contrast these three different approaches.

Question 17

An asset allocation plan should consider which of the following investor characteristics?
I) income and employment security
II) marital status
III) age and proximity to retirement
IV) social relationships and peer groups

A) II only
B) I, II and III only
C) I, III and IV only
D) I, II, III and IV

Question 18

The key areas to monitor when evaluating your portfolio holdings are the overall performance of both the economy and the financial markets, and the returns on your investments.

Question 19

Jordan invests 10% of his money in each of the 10 mutual funds available in his 401-K plan. This tendency is known as the 1/N heuristic.

Question 20

An asset allocation plan should consider which of the following factors?
I) economic outlook
II) capital preservation
III) changing investment goals
IV) investor risk tolerance

A) II only
B) II, III and IV only
C) I, III and IV only
D) I, II, III and IV

Question 21

Only capital gains that have been realized should be included in the measurement of a portfolio's return over a given period of time.

Question 22

For a stock investment, the dividend yield is calculated by

A) dividing a stock's annual cash dividend by its price.
B) dividing a stock's price by its annual cash dividend.
C) multiplying a stock's semi-annual dividend by two.
D) dividing the annual change in the stock's price plus its annual dividend amount by the beginning of the year price.

Question 23

Returns for periods greater than one year should be measured using the internal rate of return.

Question 24

Several indexes are available to monitor the performance of stocks, but nothing similar is available for bonds or mutual funds.

Question 25

The holding period return (HPR) of one's portfolio should be compared to investment goals
I) to determine whether the rate of return is commensurate with the risk involved.
II) to be sure one's portfolio is outperforming the S&P 500 Index.
III) to isolate any problem investments.
IV) to determine when to change benchmarks from the S&P 500 to the NASDAQ Composite Index.

A) I and III only
B) II and IV only
C) I, II and III only
D) II, III and IV only

Question 26

Investors need to consider the effects of taxes and transaction fees when measuring portfolio returns.

Question 27

The holding period return measures only the capital appreciation of an investment.

Question 28

Which of the following are required to measure the performance of a diversified stock portfolio?
I) Price changes
II) Dividend payments
III) An appropriate index to use as a benchmark
IV) The risk-free interest rate

A) I, III and IV only
B) I, II and IV only
C) I, II and III only
D) I, II, III and IV

Question 29

The calculation of returns on options and futures must consider income as well as capital gains.

Question 30

A rational investor will require the same return from a corporate security as from a government security.

Question 31

If an investor's portfolio is comprised of a broad range of common stocks, the best measure to use as a basis of comparison of performance is the

A) Dow Jones Industrial Average (DJIA).
B) S&P 500 index.
C) Dow Jones Corporate Bond Index.
D) American Stock Exchange utilities index.

Question 32

Indexes specifically for the performance of various types of mutual funds are published by

A) Value Line.
B) Standard and Poor's.
C) the Wall Street Journal.
D) Lipper.

Question 33

Holding period return (HPR) captures total return performance by considering current income and capital gains and is most appropriate for holding periods of one year or less.

Question 34

Changes in securities prices are not important when measuring portfolio performance unless gains or losses are realized.

Question 35

Investors need to monitor economic and market activity to assess the potential impact these factors can have on their investment portfolios.

Question 36

Marianne is in the 30% marginal tax bracket. For her, a 5% return on a tax-exempt portfolio is equivalent to a 6.5% return on a taxable portfolio.

Question 37

Most investment professionals consider the Dow Jones Industrial Average (DJIA) to be the most appropriate comparative gauge for evaluating the investment performance of a broadly based common stock portfolio.

Question 38

The best index to assess the performance of a portfolio diversified among several asset classes such as stocks, bonds and real estate is

A) the Lipper Index.
B) the NYSE Composite Index.
C) the Value Line Index.
D) No suitable index exists.

Question 39

The holding period return (HPR)

A) reflects only capital gains and losses for investment periods of one year or less.
B) calculates the annual dividend yield on stocks or current interest yield on bonds.
C) is the most appropriate measure of returns for an investment period exceeding one year.
D) can be used to determine the actual total return on stocks, bonds, and other investments for periods of one year or less.

Question 40

The S & P 500 Index is an appropriate benchmark for

A) diversified portfolios of large company stocks.
B) portfolios diversified among several asset classes such as stocks, bonds, and real estate.
C) diversified portfolios with a mix of large, small, and mid-cap stocks.
D) diversified portfolios of mid-cap and small company stocks.

Question 41

Tim purchased a stock ten months ago for $14 a share, received a $1 dividend per share last month, and sold the stock today for $16 per share. Tim has a marginal tax rate of 30%. Both capital gains for securities held more than one year and dividend income is taxed at 15%. What is Tim's after-tax holding period return?

A) 14.1%
B) 15.9%
C) 16.1%
D) 18.2%

Question 42

On January 1, Stacy's portfolio was valued at $96,534. During the year Stacy received $3,285 in interest and $4,100 in dividends. She also sold one stock at a gain of $850. The value of the portfolio on December 31 of the same year was $113,201. At the end of June, Stacy withdrew $5,000 from the portfolio. What is the holding period return for the year?

A) 25.1%
B) 25.8%
C) 26.5%
D) 27.2%

Question 43

An investor in the 25% marginal tax bracket purchased a bond for $983, received $85 in interest, and then sold the bond for $955 after holding it for six months. The tax rate for capital gains with holding periods in excess of one year is 15%. What are the pre-tax and post-tax holding period returns?

A) 5.8%; 4.3%
B) 6.0%; 4.5%
C) 5.8%; 4.5%
D) 6.0%; 4.3%

Question 44

Sharpe's measure of portfolio performance compares the risk premium on a portfolio to the portfolio's standard deviation of return.

Question 45

Investors who wish to minimize the effect of taxes on their investment returns should try to avoid

A) dividend paying stocks.
B) short-term capital gains.
C) long-term capital gains.
D) municipal bonds.

Question 46

Twelve months ago, Javier purchased a stock for $28 a share. The stock pays a quarterly dividend of $0.45 per share. Today, Javier sold the stock for $26.75 a share. What is his holding period return?

A) -4.46%
B) 1.96%
C) 6.73%
D) 19.6%

Question 47

Ten years ago, Taylor purchased 444.44 shares in a mutual fund for $22.50 per share. He has never made an additional investment in this fund, but because of reinvested dividends and capital gains, he now owns 1,200 shares with a net asset value of $25.88 per share. Ignoring taxes, his compound average annual rate of return (IRR) is

A) 10.0%.
B) 12%.
C) 21%.
D) 31%.

Question 48

Six months ago, Suzanne purchased a stock for $28 a share. Today she sold the stock at a price of $32 a share. During the time she owned the stock, she received a total of $1.30 in dividends per share. What is her holding period return?

A) 16.6%
B) 18.9%
C) 33.2%
D) 37.8%

Question 49

Sharpe measures total risk while Treynor and Jensen measure only systematic risk.

Question 50

On February 19, 2020, Angela purchased 100 shares of BRD stock at a total cost of $3,425. She received a total of $250.00 in dividends and sold the stock today, February 22, 2021 for $3,692. Angela has a marginal tax rate of 28%. The tax rate on dividend income and long- term capital gains is 15%. What is Angela's after-tax holding period return on her investment in BRD stock?

A) 15.1%
B) 12.8%
C) 10.9%
D) 7.8%

Question 51

Juan's investment portfolio was valued at $125,640 at the beginning of the year. During the year, Juan received $603 in interest income and $298 in dividend income. Juan also sold shares of stock and realized $1,459 in capital gains. Juan's portfolio is valued at $142,608 at the end of the year. All income and realized gains were reinvested. No funds were contributed or withdrawn during the year. What is the amount of income Juan must declare this year for income tax purposes?

A) $0
B) $901
C) $2,360
D) $19,328

Question 52

Maria purchased $5,000 of no-load mutual fund shares just over a year ago. She received $136 in dividend income and $201 in long-term capital gains distributions. Today she sold her shares for $5,062. Maria is in the 25% marginal tax bracket. Capital gains with holding periods in excess of one year and dividend income are taxed at 15%. What is Maria's after-tax holding period return?

A) 6.0%
B) 6.6%
C) 6.8%
D) 8.0%

Question 53

On January 1, Tim's portfolio was valued at $432,098. During the year Tim received $10,563 in interest and $15,060 in dividends. He also sold stock at a net loss of $12,870 and used the proceeds to purchase another stock. Tim did not contribute any more funds nor withdraw any funds during the year. On December 31 of the same year, Tim's portfolio was valued at $398,189. What is the holding period return for the year?

A) -5.3%
B) -4.9%
C) -2.1%
D) -1.9%

Question 54

To compute the holding period return on a bond investment, the investor should divide the purchase price of the bond into

A) any increase or decrease in the bond's price.
B) the annual coupon payment.
C) the bond's yield to maturity.
D) coupon payments received plus or minus any change in the bond's price.

Question 55

Sharpe's measure is a measure of the risk premium per unit of total risk.

Question 56

Sharpe's measure of portfolio performance adjusts for risk by dividing total portfolio return by the portfolio beta.

Question 57

A Jensen measure of 2.5% means that a security earned 2.5% more than the overall market.

Question 58

Treynor's measure and Jensen's measure use the standard deviation of portfolio return in the denominator.

Question 59

The holding period return for mutual funds should be based on

A) net asset value exclusively.
B) dividend income exclusively.
C) capital gains distributions exclusively.
D) capital gains distributions, dividends and change in net asset value.

Question 60

Jensen's measure of portfolio performance compares the return a portfolio to the beta adjusted market return.

Question 61

Which of the following are reasons to consider selling an investment that is currently in a portfolio?
I) The investment has met the original objective.
II) Better investment opportunities currently exist.
III) The outlook for the investment has improved.
IV) The investment has not met expectations and no change is expected.

A) I, II and IV only
B) I, III and IV only
C) I, II and III only
D) I, II, III and IV

Question 62

Which of the following is a "higher the better" measure?

A) only Sharpe's measure
B) only Treynor's measure
C) only Jensen's measure
D) All three are "higher the better" measures.

Question 63

One year ago, Matt bought 100 shares of ACE Corp. stock for $5,619 including commission. He is about to sell the ACE stock for $6,528 net of commissions. When he made the purchase the S&P 500 index was at 907; now it is 1070. The beta of ACE stock is 0.98, and the market's risk-free rate is 4.0%. No dividends were paid. Based on Jensen's measure, did Matt make a good purchase?

Question 64

Treynor's measure of portfolio performance focuses on

A) nondiversifiable risk.
B) diversifiable risk.
C) total risk.
D) the standard deviation of the portfolio.

Question 65

Ella's portfolio has a beta of 1.34 and a standard deviation of 16.4%. The portfolio has a total return of 14.8%. The market risk premium is 8.5%, while the return on the market portfolio was 12.0%. What is the value of Sharpe's measure for Ella's portfolio?

A) 0.21
B) 0.38
C) 0.69
D) 0.90

Question 66

A portfolio has a total return of 14.4%, a standard deviation of 18.5% and a beta of 1.43. The risk free rate is 2.5%, the market rate of return is 11.4%, and the market's Treynor measure is 6.3. What is the value of the Treynor measure of this portfolio?

A) -1.9%
B) )63 %
C) 8.32%
D) 27.4%

Question 67

Sharpe's measure of portfolio performance compares the risk premium on a portfolio to

A) a broad-based market index such as the S&P 500 index.
B) the portfolio's standard deviation of return.
C) the portfolio's beta.
D) the prevailing risk-free rate of return.

Question 68

Allison's portfolio has a beta of 1.5 and earns a return of 15%. Brianna's portfolio has a beta of 1.0 and earns a return of 11%. The risk-free rate is 3%. According to the Treynor measure,

A) Allison has the better portfolio.
B) Brianna has the better portfolio.
C) the portfolio's are equally desirable.
D) the answer depends on Allison and Brianna's risk tolerance.

Question 69

Portfolio revision is the ongoing process of systematically studying the issues in the portfolio and selling certain issues and purchasing others as the means of maintaining a portfolio that best meets the investor's objectives.

Question 70

Which of the following statements about Jensen's measure are correct?
I) Through its use of the capital asset pricing model, Jensen's measure automatically adjusts for market return.
II) In general, the higher the Jensen's measure, the better a portfolio has performed.
III) Jensen's measure is referred to as alpha.
IV) A positive Jensen's measure indicates an investment has underperformed the market on a risk-adjusted basis.

A) I and IV only
B) I, II and III only
C) II and III only
D) I, III and IV only

Question 71

The process of selling certain issues in a portfolio and purchasing new ones to replace them is known as

A) portfolio revision.
B) market timing.
C) red herring baiting.
D) dollar cost averaging.

Question 72

Allison's portfolio has an expected return of 14% and a standard deviation of 20%. Brianna's portfolio has an expected rate of return of 11% and a standard deviation of 12%. The risk-free rate is 3%. According to the Sharpe measure,

A) Allison has the better portfolio.
B) Brianna has the better portfolio.
C) the portfolio's are equally desirable.
D) the answer depends on Allison and Brianna's risk tolerance.

Question 73

Zachary holds 15 stocks in his portfolio. The portfolio's return last year was 11%, but one stock, RJH, doubled in value. What should Zachary do if he wants to be as diversified as he was at the beginning of the year?

A) Sell some of the RJH because it now constitutes a higher percentage of his holdings.
B) Sell the worst performing stock and use the proceeds to buy more RJH.
C) Wait for the price for RJH and the remaining stocks to rise so the proportions are reestablished.
D) Sell the RJH and buy a cheaper stock in the same industry.

Question 74

The Witney Growth Fund, a no-load mutual fund, had a net asset value per share of $54.28 one year ago. Its current net asset value is $56.93. During the year it paid out dividends and capital gains of $2.08 per share. It has a beta value of 1.75. Over the same period the market return was 6.4% and the risk-free rate of return was 3.5%.
(a) Calculate Treynor's measure for the Witney Growth Fund. (Show all work.)
(b) Based on Treynor's measure, how did the fund perform in relation to the overall market?

Question 75

A portfolio has a total return of 14.5%, a beta of 1.54, and a standard deviation of 17.6%. If the risk free rate is 4.5% and the market return is 10.2%, then Treynor's measure of this portfolio's performance is

A) 2.8%.
B) 3.7%.
C) 6.5%.
D) 9.4%.

Question 76

A portfolio has a total return of 10.5%, a beta of 0.72 and a standard deviation of 6.3%. The risk free rate is 3.8%, the market return is 12.4%. Jensen's measure of this portfolio's performance is

A) 0.5%.
B) 4.3%.
C) 7.9%.
D) 9.3%.

Question 77

Which one of the following statements is correct if a portfolio has a Jensen measure of return of zero?

A) The portfolio has a total return of zero percent.
B) The portfolio earned exactly its expected return on a risk-adjusted basis.
C) The portfolio outperformed the market on a risk-adjusted basis.
D) The market provides a better return on a risk-adjusted basis.

Question 78

Phil has a portfolio with a 13.2% total return. The beta of the portfolio is 1.48 and the standard deviation is 13%. Currently, the risk-free rate of return is 4% and the overall market has a total return of 11%. What is the value of Treynor's measure for Phil's portfolio?

A) 2.1%
B) 6.2%
C) 7.1%
D) 8.9%

Question 79

The Sharpe's measure for Jane Smith's investment portfolio is 0.40, while the Sharpe's measure for the market is 0.30. This information suggests that Smith's portfolio

A) exhibits superior performance because its risk premium per unit of risk is above that of the market.
B) exhibits poor performance because its risk premium per unit of risk is below that of the market.
C) is inadequately diversified, and more securities should be added to the portfolio in order to bring it in line with the market.
D) is overly diversified, and some securities should be sold to bring the portfolio in line with the market.

Question 80

Allison's portfolio has a beta of 1.37 and earns a return of 14%. Brianna's portfolio has a beta of 0.8 and earns a return of 11%. The risk-free rate is 3% and the expected rate of return on the market is 12%. According to the Jensen's measure,

A) Allison has the better portfolio.
B) Brianna has the better portfolio.
C) the portfolios are equally desirable.
D) the answer depends on Allison and Brianna's risk tolerance.