|
LOS b: Discuss the practical consequences that follow when there are restrictions on borrowing at the risk-free rate and on short selling. ffice ffice" />
Q1. The CAPM assumes that all investors will hold the same portfolio of risky assets. With respect to borrowing at the risk-free rate and on short selling, investors may hold very different portfolios:
A) if there are restrictions on both borrowing at the risk-free rate and/or short selling.
B) if there are restrictions on borrowing at the risk-free rate but not on short selling.
C) under no circumstances.
Correct answer is A)
Restrictions on short selling and/or borrowing at the risk-free rate make investors construct portfolios with considerably different compositions.
Q2. If there are restrictions on short selling and borrowing at the risk-free rate, we would expect to see that:
A) both highly risk-averse individuals and those with less risk aversion tend to concentrate their portfolios.
B) less risk-averse individuals tend to hold heavily diversified portfolios, while those with more risk aversion tend to concentrate their portfolios.
C) highly risk-averse individuals tend to hold heavily diversified portfolios, while those with less risk aversion tend to concentrate their portfolios.
Correct answer is C)
Restrictions on short selling or borrowing at the risk-free rate make investors construct portfolios with considerably different compositions. Highly risk-averse individuals tend to hold heavily diversified portfolios, while those with less risk aversion tend to concentrate their portfolios.
Q3. Bruce Rose, CFA, and Carla Hume, CFA, each manage a broadly diversified market portfolio for separate clients. Rose’s client has less risk aversion than Hume’s client. If Rose and Hume cannot borrow at the risk-free rate and cannot short-sell in the management of the portfolio, we would expect to see Rose’s portfolio:
A) to be less diversified than Hume’s portfolio.
B) and Hume’s portfolio to be equally diversified but different from the market portfolio.
C) to be more diversified than Hume’s portfolio.
Correct answer is A)
Restrictions on short selling or borrowing at the risk-free rate make investors construct portfolios with considerably different compositions. Highly risk-averse individuals tend to hold heavily diversified portfolios, while those with less risk aversion tend to concentrate their portfolios.
Q4. Brad Secrest, CFA has worked for World Funds Incorporated for many years. World Funds offers a variety of publicly traded mutual funds. The funds range from conservative fixed-income funds to high-risk funds that invest in small growth stocks and international stocks. The flagship fund of World Funds is the All Stock Fund, which Secrest manages. The stated goal of the fund is to use a wide variety of stocks to create a very diversified portfolio. In managing the fund, Secrest uses the level of the S& ffice:smarttags" />500’s return as All Stock Fund’s return benchmark, but Secrest attempts to keep the standard deviation of the returns of the All Stock Fund less than the returns standard deviation of the S& 500. Part of Secrest’s strategy is to keep the turnover ratio of the fund very low so as to keep trading costs as low as possible.
The name of the mutual fund is indicative of the inputs to its portfolio. The All Stock Fund consists of long positions in a vast universe of very different stocks. That universe of stocks includes all the stocks in the S& 500 plus several thousand stocks that trade on other exchanges, on the NASDAQ and even in the area of the over the counter market called the “pink sheets”. Secrest thinks that he has achieved, as much as is practically possible, the highest level of diversification with the thousands of stocks that he has included in the All Stock Fund. By making this portfolio available to investors, Secrest feels that he is not only doing a good job for his company but he is also doing the market a service by providing an efficient portfolio, which market participants can use to truly capitalize on the principles of the capital market line.
All Stock Fund is a public mutual fund, which has to conform to the usual trading restrictions associated with those funds. Secrest wants to initiate a second fund for World Funds. This fund would be marketed to private, sophisticated investors. By placing restrictions on who can invest in the fund, Secrest knows he can use trading strategies other than simply owning long positions in stocks. Secrest begins composing a proposal and preparing a presentation for his idea for this second fund. He will submit the proposal and make the presentation to his supervisors at World Funds. His main point will be that by engaging in strategies other than owning long positions in stocks, he can compose a more efficient portfolio than either the S& 500 or his All Stock Fund. He hopes to use both leverage and the short selling of risky assets as strategies in the new fund that he plans to propose.
Secrest plans to begin his proposal by summarizing what the term efficiency means with respect to managing investment portfolios. He then plans to go on and explain the assumptions behind important and often-used concepts such as beta and the capital market line.
Which of the following is the best definition of an efficient portfolio? The portfolio has:
A) the lowest possible standard deviation of all possible portfolios constructed from available risky assets.
B) no skewness or kurtosis and is normally distributed.
C) the lowest possible standard deviation given its return.
Correct answer is C)
This is one way of defining an efficient portfolio. The other is that it has the highest possible return given a standard deviation. The two statements say the same thing. (Study Session 18, LOS 67.a)
Q5. Secrest’s attempt to create a portfolio that is more efficient than the S& 500 by holding all the stocks in the S& 500 and thousands of other stocks is:
A) not possible, because the number of assets held in a portfolio is unrelated to efficiency.
B) possible because simply holding more assets can increase efficiency.
C) possible, but it is not likely given that Secrest does not trade the stocks very much.
Correct answer is B)
Holding more assets will increase efficiency. (Study Session 18, LOS 67.a)
Q6. Which of the following should help improve the efficiency of the Secrest’s proposed private fund?
A) Short selling risky assets.
B) Short selling the risk-free asset.
C) Not investing in pink sheet stocks.
Correct answer is A)
Being able to short sell risky assets should improve the efficiency of the portfolio. (Study Session 18, LOS 67.a)
Q7. If investors cannot borrow at the risk free rate then this will:
A) affect the relationship between the asset’s return and beta and reduce the usefulness of the Treynor measure.
B) not affect the relationship between the asset’s return and beta, but it will reduce the usefulness of the Treynor measure.
C) affect the relationship between the asset’s return and beta, but it will not reduce the usefulness of the Treynor measure.
Correct answer is A)
If investors cannot borrow at the risk-free rate, this will reduce the usefulness of beta. Since beta is an input in the Treynor measure, it will reduce the usefulness of that measure too. (Study Session 18, LOS 67.b)
Q8. Secrest thinks that his All Stock Fund has allowed investors to capitalize on the principles of the capital market line. This may not be true:
A) if the All Stock Fund is not efficient but could be true even if investors cannot borrow at the risk-free rate.
B) if the All Stock Fund is not efficient and/or investors cannot borrow at the risk-free rate.
C) if the All Stock Fund is efficient and even if investors cannot borrow at the risk-free rate.
Correct answer is B)
Either of these conditions, the fund not being efficient and investors not being able to borrow at the risk-free rate, will mean that the principles of the capital market line probably do not hold. (Study Session 18, LOS 67.a)
Q9. In the absence of short selling of risky assets and borrowing at the risk-free rate, we would expect to see more risk averse investors hold:
A) concentrated portfolios and less risk averse investors hold more heavily diversified portfolios.
B) heavily diversified portfolios and less risk averse investors hold more concentrated portfolios.
C) heavily diversified portfolios and less risk averse investors hold heavily diversified portfolios.
Correct answer is B)
Under these conditions, the capital market line will not work. Thus, investors will not be able to simply invest in the market portfolio and the risk-free asset. They will have to hold different portfolios as indicated. (Study Session 18, LOS 67.b)
| 
发表于 2009-4-2 13:31
| 
