Question 81
An investor insists that his portfolio maintain its value in terms of purchasing power and is quite concerned about a loss of value. This investor’s return objective is best described as:
A) total return. B) capital appreciation. C) current income. D) capital preservation.
The correct answer was D) capital preservation. The capital preservation objective is appropriate when a portfolio must earn a return that is at least equal to the inflation rate (maintain its purchasing power) with a very low risk of losing value.
This question tested from Session 12, Reading 49, LOS c
Question 82
A stock is expected to earn a return of 10%, which is 6% greater than the risk-free rate. If the expected return on the market is 12% and the beta of the stock is 0.75, the stock most likely:
A) is overvalued. B) is properly valued. C) will plot above the security market line. D) will plot below the security market line. The correct answer was B) is properly valued. The risk-free rate is 10% − 6% = 4%. Using the CAPM, the required return on the stock is 4% + 0.75(12% − 4%) = 10%. Because the expected return on the stock is equal to its required return, the stock is properly valued according to the CAPM and will plot on the security market line. (Tip: You can immediately eliminate the responses “is overvalued” and “will plot below the security market line” because they mean the same thing.)
This question tested from Session 12, Reading 51, LOS e
Question 83
The Markowitz investment model assumes that all investors:
A) exhibit the same degree of risk aversion. B) can borrow or lend any amount at the risk-free rate. C) measure risk as the variance of expected return. D) have the same one-period time horizon.
The correct answer was C) measure risk as the variance of expected return. The Markowitz framework assumes investors measure risk as the variance or standard deviation of expected returns. Markowitz assumes all investors are risk averse, but not necessarily equally so. A one-period time horizon for all investors and borrowing and lending at the risk-free rate are assumptions of the capital asset pricing model.
This question tested from Session 12, Reading 50, LOS b
Question 84
James Harman, CFA, is preparing an investment policy statement for Lucy Williams, a 65-year old widow who has several grandchildren. Williams inherited a large amount of money and has adequate health and property insurance. Williams explains that she wants at least 5% of her assets to be invested in equities in the defense industry. Harman's assessment of Williams' risk tolerance is least likely to consider her:
A) age. B) inheritance money. C) preference for defense stocks. D) insurance coverage.
The correct answer was C) preference for defense stocks. An investor’s risk tolerance is affected by psychological factors that reflect an investor’s comfort with risk, as well as personal factors such as age, existing wealth, and insurance coverage. Harman should include Williams' desire to invest in defense stocks in her IPS as one of her unique needs and preferences. This question tested from Session 12, Reading 49, LOS b
Question 85
Which of the following statements about bond indexes and international asset indexes is least accurate?
A) Global equity indexes were created to alleviate sample selection and weighting problems with local indexes. B) A bond index is more difficult to create than an equity index because the universe of bonds is narrower than the universe of stocks. C) Low correlations among monthly returns on country indexes support international diversification. D) Correlations among investment-grade bond indexes are higher than correlations among high-yield bond indexes. The correct answer was B) A bond index is more difficult to create than an equity index because the universe of bonds is narrower than the universe of stocks. A bond index is more difficult to create than an equity index because the universe of bonds is broader than the universe of stocks.
This question tested from Session 13, Reading 53, LOS b | 
发表于 2008-5-26 12:16
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