Chapter 7

Question 1 of 16

1

Portfolio performance is:

Select one of the following:

  • rarely measured in absolute terms, mostly measured in relative terms

  • rarely measured in relative terms, mostly measured in absolute terms

  • only ever measured in relative terms

  • only ever measured in absolute terms

Explanation

Question 2 of 16

1

Which of the following is a limitation rather than an assumption of the Capital Asset Pricing
Model?

Select one of the following:

  • Investors are rational and risk averse

  • Investors hold a well-diversified portfolio

  • Investors make investment decisions based on mean variance analysis

  • Investors are rewarded for more than just their exposure to systemic risk

Explanation

Question 3 of 16

1

An investor allowed the principle of 'regret aversion' to influence his actions. This resulted in
him:

Select one of the following:

  • declining to buy a stock based purely on a previous bad experience

  • B buying a badly performing stock from a friend as recompense for recommending it in the
    first place

  • holding a poorly performing stock for an irrationally long period

  • only selling stock once a specified loss threshold had been reached

Explanation

Question 4 of 16

1

Why is a time weighted return (TWR) preferred to a money weighted return (MWR) when
evaluating performance?

Select one of the following:

  • TWR only requires portfolio values at the start and end of the investment period along
    with dates and size of each cash flow

  • TWR eliminates the timing effect of cash flows into and out of the fund

  • TWR measures the fund growth resulting from both the underlying performance of the
    portfolio and the size and timing of cash flows into and out of the fund

  • TWR calculates the risk adjusted return per unit of risk

Explanation

Question 5 of 16

1

Four bond portfolios each hold a variety of stock. Which one of them is BEST described as
operating a barbell strategy?

Select one of the following:

  • Portfolio A, which consists solely of bills maturing in one year plus bonds maturing in 25
    and 30 years

  • Portfolio B, which consists solely of bills maturing in six months plus bonds maturing in 5,
    10, 15 and 20 years

  • Portfolio C, which consists solely of bonds maturing in 1, 3 and 5 years

  • Portfolio D, which consists solely of bonds maturing in 20, 25 and 30 years

Explanation

Question 6 of 16

1

Why do portfolios need a regular annual or periodic review?

Select one of the following:

  • To ensure that all assets are priced on a regular basis

  • To ensure that all assets are reconciled against the market

  • To ensure that all cash balances are reconciled against the actual bank

  • To ensure the portfolio still meets the client's objectives and is positioned correctly given
    the market conditions

Explanation

Question 7 of 16

1

The excess return of a portfolio or security above that of the risk adjusted benchmark is known
as:

Select one of the following:

  • alpha

  • beta

  • duration

  • premium

Explanation

Question 8 of 16

1

An investment manager believes that markets are inefficient and that he can obtain abnormal
returns after transaction charges. Which investment style is he most likely to adopt?

Select one of the following:

  • Passive

  • Indexation

  • Active

  • Satellite

Explanation

Question 9 of 16

1

An individual has been advised to invest in some shares by a friend. He wants to make sure that
he invests in companies which do not have a volatile share price. To achieve this he should
select shares which have a beta factor of:

Select one of the following:

  • 1

  • 1.25

  • 1.5

  • 1.75

Explanation

Question 10 of 16

1

Which of the following is a feature in Arbitrage Pricing Theory (APT)?

Select one of the following:

  • APT relies on identified factors being correlated

  • The variables of APT include real economic factors

  • The principal component of APT is the return on an index of all shares

  • APT is equivalent to a single factor Capital Asset Pricing Model

Explanation

Question 11 of 16

1

Based on the principles of Modern Portfolio theory, an equity fund will operate on the
'efficient frontier' if:

Select one of the following:

  • the optimum level of systematic risk is obtained

  • the best level of diversification is achieved

  • the fund's alpha value is negative

  • the fund's beta value is one or more

Explanation

Question 12 of 16

1

Bond portfolio X exclusively contains relatively long-dated stock whereas Bond portfolio Y
operates a laddering strategy. This means that Bond X is likely to:

Select one of the following:

  • generate higher yields

  • present less of a credit risk

  • be more sensitive to interest rate changes

  • represent a more diversified approach

Explanation

Question 13 of 16

1

In which country can shareholders be assured that listed companies will comply with the OECD
Principles for Corporate Governance?

Select one of the following:

  • France

  • Germany

  • UK

  • USA

Explanation

Question 14 of 16

1

An investor has a requirement for an 8% return and is considering choosing Stock X to satisfy
this need. Based on the Capital Asset Pricing Model, if the beta value of this stock is
recalibrated from 1.2 to 1.3, this would:

Select one of the following:

  • increase the likelihood that the stock would be suitable

  • decrease the likelihood that the stock would be suitable

  • automatically trigger an increase in the investor's required rate

  • automatically trigger a decrease in the investor's required rate

Explanation

Question 15 of 16

1

Using Modern Portfolio Theory to create a two stock portfolio, which of the following is TRUE?

Select one of the following:

  • The lower the correlation of stock returns, the greater the portfolio's diversification

  • The higher the correlation of stock returns, the greater the portfolio's diversification

  • The higher the correlation of stock returns, the lower the level of total risk associated with
    any given level of expected return

  • The lower the correlation of stock returns, the higher the level of total risk associated with
    any given level of expected return

Explanation

Question 16 of 16

1

Which of the following does a passive investment manager principally invest in?

Select one of the following:

  • Equities

  • An index

  • Fixed income

  • Other institutional funds

Explanation

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