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#### Portfolio Construction Management And Protection 5th Edition by R. A. Strong -Test Bank

**Chapter Two**

**Valuation, Risk, Return, and Uncertainty**

**A** 1. An ordinary annuity is a _____ series of _____ cash.

- finite, constant
- finite, growing
- infinite, constant
- infinite, growing

**B** 2. The winner of a state lottery usually receives a(n)

- ordinary annuity
- annuity due
- growing annuity
- perpetuity

**B** 3. Using a discount rate of 8% per year, what is the present value of an ordinary annuity of $100 per year for 10 years?

- $1,000
- $671
- $887
- $557

**A** 4. Using a discount rate of 8% per year, what is the present value of an annuity due of $100 per year with 10 payments?

- $725
- $559
- $793
- $772

**D** 5. Using a discount rate of 8% per year (compounded quarterly), what is the present value of an ordinary annuity of $100 per year for 10 years?

- $726
- $662
- $811
- $684

**C** 6. A perpetual cash flow stream makes its first payment of $500 in one year. Using a 7% annual discount rate and a 3% growth rate in the value of subsequent payments, what is the present value of this growing perpetuity?

- $2,000
- $20,000
- $12,500
- $125,000

**B** 7. A perpetuity makes annual payments of $250. The perpetuity is valued using a 10% discount rate. What is the value of the perpetuity if the first payment is made immediately?

- $2,500
- $2,750
- $25,000
- $2,525

**A** 8. The fact that most investors are risk averse means they will

- only take risks for which they are properly rewarded
- not take a risk
- not voluntarily take a risk
- not take a risk unless they know the outcome in advance

**B** 9. Which of the following statements is true?

- Some people are risk averse and others are not
- Some people are more risk averse than others
- Risk averse people will not take a risk
- Risk averse people are willing to settle for less return than risk neutral people

**A** 10. Risk must involve

- a chance of loss
- an unknown probability distribution
- actual dollars
- negative expected returns

**C** 11. Overall variability of returns is called

- systematic risk
- unsystematic risk
- total risk
- undiversifiable risk

**B** 12. Risk is often measured as

- central tendency of returns
- dispersion of returns
- expected value of returns
- possibility of negative returns

**A** 13. Riskier securities have _____ returns.

- higher expected
- lower realized
- higher instantaneous
- lower long-term

**B** 14. The market rewards investors for bearing _____risk.

- diversifiable
- undiversifiable
- unsystematic
- total

**B** 15. The diminishing marginal utility of money explains why

- some stocks sell for more than others
- most people will not take a fair bet
- people view the stock market as risky
- people tend to pay too much

**C** 16. The text described an example of the diminishing marginal utility of money with a statement made by a _____ player.

- hockey
- football
- tennis
- basketball

**C** 17. Individual investment behavior is more a function of _____ than _____.

- risk, expected return
- expected return, utility
- utility, expected return
- expected return, risk

**B** 18. The St. Petersburg paradox explains why

- some stocks sell for more than others
- most people will not take a fair bet
- people view the stock market as risky
- people tend to pay too much

**A** 19. In economic theory, if money is not saved, it is

- consumed
- invested
- unrealized
- deferred

**D** 20. Wearing a Rolex watch is an example of someone getting

- psychic return
- utility
- satisfaction
- all of the above

**B** 21. Two large classes of risk are

- systematic and undiversifiable
- price and convenience
- realized and psychic
- market and intermarket

**C** 22. Individual consumption decisions are a major factor in determining

- credit ratings of corporations
- dividend rates
- market interest rates
- levels of perceived risk

**B** 23. If a stock has a higher than average expected return, you would logically expect it is

- widely held by investors
- riskier than average
- in an industry with good prospects
- a well-managed company

**D** 24. What is the present value of a growing perpetuity with an initial cash flow of 1000 (C_{0}), a growth rate of 3% per year (g), and a required rate of return of 8% (R)?

- $7777.64
- $12,500
- $20,000
- $20,600

**C** 25. Most investors would not be interested in a fair bet because

- they would be concerned whether it is really fair
- investors do not willingly take a risk when it is possible to lose money
- losing a given amount of money would reduce utility more than winning the same amount would increase utility
- they accept only bets with a sure outcome

**B** 26. The holding period return is calculated as

**C** 27. You bought 100 shares of stock at $35, received $3 per share in dividends, and sold the shares for $50. Your holding period return is

- 36%
- $1,503
- 4%
- $5,300

**B** 28. Which of the following is true of the holding period return?

- It considers the time value of money
- It is independent of the passage of time
- It explicitly considers risk
- It only considers capital gains or losses

**C** 29. A holding period return should only be compared with returns calculated

- over shorter periods
- over longer periods
- over periods of the same length
- over periods of the same length or less

**D** 30. A stock’s return is 15.5%. The return relative is

- 845
- -0.845
- 155
- 155

**D** 31. Return relatives are calculated primarily to deal with the potential problem of

- changing returns
- large returns
- zero returns
- negative returns

**A** 32. A stock has monthly returns of 4%, 5%, 2%, and -3%. Its arithmetic average return is

- 2%
- 3%
- 4%
- 5%

** **

**A** 33. A stock has monthly returns of 4%, 5%, 2%, and -3%. Its geometric average return is

- 9%
- 1%
- 3%
- cannot be determined

**B** 34. You buy a stock for $50 per share. Over the next four months, it has monthly returns of 4%, 5%, 2%, and -3%. The value of a share at the end of the fourth month is

- $51.20
- $54.02
- $54.12
- $56.45

**A** 35. Suppose a stock pays no dividends. Another method of calculating the return relative is

** **

**A** 36. The arithmetic mean is always _______ the geometric mean.

- greater than or equal to
- greater than
- less than or equal to
- less than

**A** 37. The _____ the dispersion in a series of numbers, the ____ the gap between the arithmetic and geometric mean.

- greater, greater
- greater, smaller
- smaller, greater
- more predictable, less predictable

**A** 38. Technically, _____ refers to the past; _____ refers to the future.

- return, expected return
- realized return, return
- return relative, return
- return, return relative

**C** 39. According to the book, which of the following terms can mean different things to different people?

- Return on assets
- Return on equity
- Return on investment
- Return of principal

** **

**B** 40. The use of _____ can dramatically affect an investor’s return.

- historical data
- leverage
- arithmetic averages
- variance calculations

**D** 41. Total risk can be measured by all of the following except

- variance
- standard deviation
- semi-variance
- arithmetic mean

**D** 42. The variance of *x* is 25. What is the variance of *2x*?

- 25
- 50
- 75
- 100

**B** 43. Semi-variance only considers

- extreme variation
- adverse variation
- unexpected variation
- anticipated variation

**C** 44. Discrete random variables are _____; continuous random variables are ______.

- quantifiable, unquantifiable
- objective, subjective
- counted, measured
- dependent, independent

**B** 45. A variable whose value is based on the value of other variables is a(n)

- independent variable
- dependent variable
- stochastic variable
- estimated variable

**A** 46. Random variables reside in a

population

- sample
- continuous set
- discrete set

**A** 47. A jar contains a mixture of coins; you need a quarter. From your perspective, the distribution of coins in the jar is

univariate

- bivariate
- trivariate
- multivariate

**D** 48. If a distribution shows more possible outcomes on one side of the mean than the other, the distribution shows

- uniformity
- normal characteristics
- random characteristics
- skewness

**D** 49. A coin-flipping experiment in which you measure heads or tails takes observations from a _____ distribution.

- chi-square
- exponential
- Poisson
- binomial

**D** 50. Which of the following is a measure of central tendency?

- Skewness
- Variance
- Kurtosis
- Mean

**D** 51. The expected value of a random variable is also called the

- skewness
- variance
- kurtosis
- mean

**D** 52. A jar contains 100 quarters, 50 dimes, and 50 nickels. What is the expected value of a single observation from this coin population?

- $0.375
- $0.200
- $0.133
- $0.163

**D** 53. Which of the following can help reduce the effect of outliers?

- Rounding
- Regression
- Interpolation
- Logarithms

**C** 54. The expected value of *x* is 5%. What is E(6*x*)?

- 833%
- 5%
- 30%
- Cannot be determined

**A** 55. The correlation coefficient is equal to

**A** 56. The minimum value of the correlation coefficient is

- -1
- 0
- +1
- there is no minimum value

**D **57. The minimum value of covariance is

- -1
- 0
- +1
- there is no minimum value

**A** 58. R squared is a measure of

- goodness of fit
- partial dispersion
- central tendency
- skewness

**B** 59. A sample of 100 observations has a standard deviation of 25. What is the standard error?

- 5
- 5
- .25
- Cannot be determined

**C** 60. A sample of 100 observations has a standard deviation of 25 and a mean of 75. What is the 95% confidence interval?

**B** 61. The expected return on *A* is 12%; the expected return on *B* is 15%. What is the expected return of a portfolio that contains one-third *A* and the remainder *B*?

- 12%
- 14%
- 15%
- 5%

**A** 62. A tilde (~) over a symbol indicates it is a

- random variable
- constant
- continuous random variable
- discrete random variable

**B** 63. If two securities are negatively correlated, their covariance is

- positive
- negative
- zero
- cannot be determined

**C** 64. The covariance between a random variable and a constant is

- negative
- positive
- zero
- non-negative

**A** 65. Return is the

- benefit associated with an investment
- realized gain from an investment
- realized and unrealized gain from an investment
- measurable gain from an investment

**C** 66. Assume the risk-free rate is constant over time. The correlation between the return on security x and the return on the risk-free asset is

- negative
- positive
- zero
- cannot be determined without further information

**A** 67. The correct method for measuring the average return over several periods in the past is with a(n)

- geometric mean
- arithmetic mean
- statistical mean
- multiple variation mean

**B** 68. Using semivariance to measure risk is appropriate if the return distribution is

- symmetrical
- not symmetrical
- normally distributed
- uniformly distributed

** **

**C** 69. The median of a distribution is the

- arithmetic average
- geometric average
- point where half of the observations lie on either side
- value that occurs most frequently

**D** 70. If the variance of x is 0.10, what is the variance of 2x?

- 05
- 10
- 20
- 40

**B** 71. If the standard deviations of Stock A and B are 0.20 and 0.30 respectively and the COV(A,B) equals 0.012, what is the correlation coefficient?

- 00072
- 20
- 30
- 2

**Chapter Four**

** **

**Investment Policy**

**C **1. Retirement plans in the United States are subject to

- FDRC
- FERC
- ERISA
- ESSES

**A **2. All of the following are purposes of an investment policy statement EXCEPT

- identify portfolio manager
- identify target return
- identify investment constraints
- provide a mechanism for evaluation

**B** 3. Clients are responsible for all of the following EXCEPT

- defining long-range objectives
- asset allocation
- ensuring managers follow the investment policy
- establishing investment policy

**D** 4. The investment manager is responsible for all of the following EXCEPT

- educating the client regarding infeasible objectives
- monitoring the portfolio
- revising the portfolio as necessary
- establishing investment policy

**B** 5. In the Bailard, Biehl, and Kaiser classification system what kind of person is impetuous and anxious?

- Individualist
- Celebrity
- Adventurer
- Guardian

**A** 6. In the Bailard, Biehl, and Kaiser classification system what kind of person is confident and careful?

- Individualist
- Celebrity
- Adventurer
- Guardian

**C** 7. In the Bailard, Biehl, and Kaiser classification system what kind of person is impetuous and confident?

- Individualist
- Celebrity
- Adventurer
- Guardian

**D** 8. All of the following are true regarding an endowment fund except

- it is not-for-profit
- churches and universities often have one
- it has a board of trustees or directors
- is has a maximum life of 75 years

**B** 9. An endowment is most similar to a

- defined contribution pension plan
- foundation
- property and casualty insurance company
- mutual fund

**C** 10. The legal literature speaks of the ______ between the needs of current beneficiaries and future beneficiaries.

- parsimony
- symbiosis
- creative tension
- rational expectations

**A **11. An investor’s tendency to look at their investment portfolio too often is partially explained by a phenomenon known as

- myopic loss aversion
- absolute risk aversion
- time and state preference
- mental accounting

**D **12. Surplus management is most associated with

- mutual funds
- endowment funds
- foundations
- insurance companies

**C **13. The single most important investment decision is

- time horizon
- investment strategy
- asset allocation
- risk assessment

**B **14.** **A good performance benchmark should be

- published in a national financial newspaper like the
*Wall Street Journal* - investable
- composed equally of stocks and bonds
- revised as market conditions change

**B **15. All of the following are infeasible return objectives except

- maintain purchasing power with 100% probability
- average a 9% rate of return over a five year average
- earn a 10% rate of return each calendar year
- ensure the value of the fund never falls below the initial principal and that it produces an annual yield of 7%

**A **16. Most states have adopted the

- Uniform Management of Institutional Funds Act
- Foundation Policy Act
- Uniform Statement of Investment Policy
- Safe Harbor Institutional Security Statement

** **

**D **17. Major categories of constraints in the investment policy statement include all of the following except

- tax situation
- liquidity needs
- legal considerations
- benchmarking

**A** 18. Purposes of an endowment fund include all of the following except

- raise the visibility of the institution
- help maintain operating independence
- provide operational stability
- provide a margin of excellence

**B** 19. The two main types of pension funds are

- defined contribution and variable contribution
- defined contribution and defined benefit
- fixed annuity and variable annuity
- equity based and fixed income based

**D** 20. The investment policy of which of the following is mostly liability driven?

- Mutual fund
- Property and casualty insurance company
- Foundation
- Life insurance company

**A** 21. Characteristics of a good investment policy statement include all of the following except

- revised quarterly
- realistic
- unambiguous to an outsider
- sustainable over prior periods

**B** 22. The investment policy is the responsibility of the

- investment manager
- client
- ERISA administrators
- SEC

** **

**C** 23. Enforcing the ERISA regulations is the responsibility of

- investment managers
- the Federal Reserve
- the Department of Labor
- the SEC

**D** 24. The investment policy statement should be changed if there is a material change in

- economic conditions
- the performance of the portfolio
- the allocation of assets in the portfolio
- the clients financial condition

**C** 25. A foundation is

- the section of an investment policy statement that specifies the primary goals and objectives of an investor
- the first section of an investment policy statement
- an organization designed to aid the arts, education, research or general welfare
- a legal document outlining the portfolio management principles to be followed

**D** 26. A fiduciary is

- an investor with experience managing investments
- an investor with little experience managing investments
- an investment advisor to those managing investments
- someone responsible for the management of someone else’s money

**A** 27. Socially responsible investing based on religious beliefs is known as

- faith-based investing
- denominational investing
- religious fund management
- life ethics investing

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