Question 1

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

Accepted Answer

Passive management involves maintaining a fixed portfolio allocation and not frequently adjusting it, aiming to match market returns rather than outperform them.

Question 2

Naive strategies

Accepted Answer

Naive strategies are not necessarily bad ones because they can be effective in certain market conditions. For example, a buy-and-hold strategy can be effective in a bull market, and a dollar-cost averaging strategy can be effective in a bear market.

Question 3

Which of the following is a naive strategy?

Accepted Answer

A naive strategy is one that is simple and does not involve frequent adjustments or complex decision-making. "Buy and hold" is a naive strategy because it involves purchasing securities and holding them for a long period without frequent trading or adjustments.

Question 4

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

Accepted Answer

The answer of Common methods of stock portfolio rebalancing include...

Question 5

Many investors try to avoid

Accepted Answer

Investors often avoid odd lots because they are smaller quantities of shares that can incur higher transaction costs and may indicate less liquidity.

Question 6

The purchase of odd lots sometimes involves

Accepted Answer

Odd lots, which are stock purchases of less than 100 shares, often incur slightly higher commission costs because they are not traded in standard round lots.

Question 7

Round lots are especially important to the

Accepted Answer

Round lots are especially important to the option user because options are typically traded in standardized contracts of 100 shares, known as round lots.

Question 8

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

Accepted Answer

Constant proportion portfolio insurance (CPPI) uses a multiplier to determine the amount of risky assets to hold in a portfolio, adjusting the allocation based on market conditions.

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

Accepted Answer

The investment in stock is calculated as: (Market Value - Floor Value) * Multiplier = ($7 million - $4 million) * 1.5 = $4.5 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

Accepted Answer

The formula for the portfolio value where it is 100% invested in stock is: Floor value + (Multiplier * (Market value - Floor value)). Plugging in the values: $4 million + 1.5 * ($7 million - $4 million) = $4 million + $4.5 million = $8.5 million. Since the portfolio value is already $7 million, it will be 100% invested in stock when it reaches $12 million.

Question 11

Which of the following statements is most accurate?

Accepted Answer

A CPPI (Constant Proportion Portfolio Insurance) strategy benefits from market volatility as it allows for dynamic rebalancing to protect the portfolio while capturing upside potential.

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

Accepted Answer

The floor value is the minimum value at which the portfolio will be entirely invested in bonds. Since the floor value is $4 million, the portfolio will be 100% in bonds when its value is $4 million.

Question 13

A constant mix strategy does best in a _____ market.

Accepted Answer

A constant mix strategy performs best in a volatile market because it involves rebalancing the portfolio to maintain a fixed asset allocation, allowing investors to buy low and sell high as asset prices fluctuate.

Question 14

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

Accepted Answer

When stocks outperform bonds, their proportion in the portfolio increases. To maintain the original allocation, you need to sell some stocks and buy bonds.

Question 15

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

Accepted Answer

In a rising market, a constant mix strategy sells stocks to maintain a fixed asset allocation, while a CPPI strategy buys more stocks to increase exposure as the cushion grows.

Question 16

A constant mix strategy for portfolio rebalancing means

Accepted Answer

A constant mix strategy involves maintaining a fixed proportion of different asset categories, such as stocks and bonds, in a portfolio, regardless of market fluctuations.

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

Accepted Answer

The portfolio is currently 50% stocks and 50% bonds. After the market increases, the portfolio is 60% stocks and 40% bonds. To rebalance, we need to sell 10% of the stocks and buy 10% of the bonds. This means selling $50,000 in stocks and buying $50,000 in bonds.

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

Accepted Answer

The cushion is the difference between the market value and the floor value, which is $7 million - $4 million = $3 million. With a multiplier of 1.5, the investment in stocks is 1.5 * $3 million = $4.5 million. If the portfolio increases by 20%, the new market value is $7 million * 1.2 = $8.4 million. The new cushion is $8.4 million - $4 million = $4.4 million. The new investment in stocks is 1.5 * $4.4 million = $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

Accepted Answer

The correct answer is A because the CPPI portfolio is above its floor value and the stocks have increased in value. Therefore, the portfolio needs to be rebalanced by buying stocks and selling bonds.

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

Accepted Answer

A portfolio with a beta of 1 and a high R² indicates that it closely follows the market index in terms of both volatility and correlation, resulting in less tracking error.

Quiz 15: Revision of the Equity Portfolio