Question 81

The Capital Market Line (CML) shows that under certain assumptions, when a portfolio on the Markowitz efficient frontier is combined with an investment in a risk-free asset:

A)    there is a positive linear relationship between portfolio risk and expected return.

B)   all portfolios on the Markowitz efficient frontier are dominated in terms of risk and return by a portfolio on the CML.

C)   a 100% allocation to the risk-free asset results in a portfolio with an expected return and standard deviation of zero.

D)   the maximum attainable expected return results from a 100% allocation to the frontier portfolio and a 0% allocation to the risk-free asset.

Question 82

An investor with a below-average risk tolerance wants her portfolio to gain value through capital gains and reinvestment of income. Her most appropriate return objective is:

A)    capital preservation.

B)   total return.

C)   capital appreciation.

D)   current income.

Question 83

Kendra Jackson, CFA, is given the following information on two stocks, Rockaway and Bridgeport.

• Covariance between the two stocks = 0.0325

• Standard Deviation of Rockaway’s returns = 0.25

• Standard Deviation of Bridgeport’s returns = 0.13

Assuming that Jackson must construct a portfolio using only these two stocks, which of the following combinations will result in the minimum variance portfolio?

A)    100% in Rockaway.

B)   100% in Bridgeport.

C)   50% in Bridgeport, 50% in Rockaway.

D)   80% in Bridgeport, 20% in Rockaway.

Question 84

Charlie Smith holds two portfolios, Portfolio X and Portfolio Y. They are both liquid, well-diversified portfolios with approximately equal market values. He expects Portfolio X to return 13% and Portfolio Y to return 14% over the upcoming year. Because of an unexpected need for cash, Smith is forced to sell at least one of the portfolios. He uses the security market line to determine whether his portfolios are undervalued or overvalued. Portfolio X’s beta is 0.9 and Portfolio Y’s beta is 1.1. The expected return on the market is 12% and the risk-free rate is 5%. Smith should sell:

A)    portfolio X only.

B)   both portfolios X and Y because they are both overvalued.

C)   either portfolio X or Y because they are both properly valued.

D)   portfolio Y only.

Question 85

Tamira Scott, CFA, manager of an index fund, believes in the efficient market hypothesis but remembers that there are a few anomalies she can take advantage of to earn higher returns. Scott would be least likely to earn excess returns by purchasing stocks in:

A)    companies with low price/earnings ratios or with high book-to-market ratios.

B)   companies that announce stock splits.

C)   companies not followed by analysts.

D)   mid-December, with the intent to sell in early January.

[此贴子已经被作者于2008-11-8 17:56:07编辑过]

Question 81

The Capital Market Line (CML) shows that under certain assumptions, when a portfolio on the Markowitz efficient frontier is combined with an investment in a risk-free asset:

A)    there is a positive linear relationship between portfolio risk and expected return.

B)   all portfolios on the Markowitz efficient frontier are dominated in terms of risk and return by a portfolio on the CML.

C)   a 100% allocation to the risk-free asset results in a portfolio with an expected return and standard deviation of zero.

D)   the maximum attainable expected return results from a 100% allocation to the frontier portfolio and a 0% allocation to the risk-free asset.

The correct answer was A) there is a positive linear relationship between portfolio risk and expected return.

Under the assumptions of the capital market theory, the CML represents the positive linear relationship between portfolio risk (standard deviation of returns) and expected return. Not every portfolio on the Markowitz efficient frontier is dominated by a portfolio on the CML: the market (tangency) portfolio lies on both. An expected return greater than that of the market portfolio can be attained by borrowing at the risk-free rate and investing the borrowed funds in the frontier portfolio (allocating more than 100% of assets to the frontier portfolio). A portfolio with a 100% allocation to the risk-free asset will have a standard deviation of zero and an expected return equal to the risk-free rate.

This question tested from Session 12, Reading 51, LOS a, (Part 2)

Question 82

An investor with a below-average risk tolerance wants her portfolio to gain value through capital gains and reinvestment of income. Her most appropriate return objective is:

A)    capital preservation.

B)   total return.

C)   capital appreciation.

D)   current income.

The correct answer was B) total return.

The total return objective describes a portfolio that is structured to grow in value to meet a future need through both capital gains and the reinvestment of current income. A capital appreciation objective seeks to grow the portfolio value through capital gains and is more appropriate for less risk-averse investors.

This question tested from Session 12, Reading 49, LOS c

Question 83

Kendra Jackson, CFA, is given the following information on two stocks, Rockaway and Bridgeport.

• Covariance between the two stocks = 0.0325

• Standard Deviation of Rockaway’s returns = 0.25

• Standard Deviation of Bridgeport’s returns = 0.13

Assuming that Jackson must construct a portfolio using only these two stocks, which of the following combinations will result in the minimum variance portfolio?

A)    100% in Rockaway.

B)   100% in Bridgeport.

C)   50% in Bridgeport, 50% in Rockaway.

D)   80% in Bridgeport, 20% in Rockaway.

The correct answer was B)

First, calculate the correlation coefficient to check whether diversification will provide any benefit.

r_{Bridgeport, Rockaway} = cov_{Bridgeport, Rockaway} / [( s_Bridgeport) × (s_Rockaway) ] = 0.0325 / (0.13 × 0.25) = 1.00

Since the stocks are perfectly positively correlated, there are no diversification benefits and we select the stock with the lowest risk (as measured by variance or standard deviation), which is Bridgeport.

This question tested from Session 12, Reading 50, LOS e

Question 84

Charlie Smith holds two portfolios, Portfolio X and Portfolio Y. They are both liquid, well-diversified portfolios with approximately equal market values. He expects Portfolio X to return 13% and Portfolio Y to return 14% over the upcoming year. Because of an unexpected need for cash, Smith is forced to sell at least one of the portfolios. He uses the security market line to determine whether his portfolios are undervalued or overvalued. Portfolio X’s beta is 0.9 and Portfolio Y’s beta is 1.1. The expected return on the market is 12% and the risk-free rate is 5%. Smith should sell:

A)    portfolio X only.

B)   both portfolios X and Y because they are both overvalued.

C)   either portfolio X or Y because they are both properly valued.

D)   portfolio Y only.

The correct answer was D) portfolio Y only.

Portfolio X’s required return is 0.05 + 0.9 × (0.12-0.05) = 11.3%. It is expected to return 13%. The portfolio has an expected excess return of 1.7%

Portfolio Y’s required return is 0.05 + 1.1 × (0.12-0.05) = 12.7%. It is expected to return 14%. The portfolio has an expected excess return of 1.3%.

Since both portfolios are undervalued, the investor should sell the portfolio that offers less excess return. Sell Portfolio Y because its excess return is less than that of Portfolio X.

This question tested from Session 12, Reading 51, LOS e

Question 85

Tamira Scott, CFA, manager of an index fund, believes in the efficient market hypothesis but remembers that there are a few anomalies she can take advantage of to earn higher returns. Scott would be least likely to earn excess returns by purchasing stocks in:

A)    companies with low price/earnings ratios or with high book-to-market ratios.

B)   companies that announce stock splits.

C)   companies not followed by analysts.

D)   mid-December, with the intent to sell in early January.

The correct answer was B)

According to event studies of the semi-strong form of the EMH, investors do not earn abnormal returns by trading before and after releases of significant company information such as stock splits. This finding supports the EMH.

The other choices are documented market anomalies. That is, they argue against the semi-strong form of the EMH, and suggest that investors can earn excess returns by exploiting these anomalies. The January anomaly (from a time-series test of the semi-strong EMH) suggests that investors can earn excess returns by buying stocks in December and selling them in the first week of January, due to tax-induced trading at year-end. Cross-sectional tests of the semi-strong form EMH have shown that low P/E stocks, stocks of firms neglected by analysts, and stocks of firms with high book to value ratios can produce superior returns.

This question tested from Session 13, Reading 54, LOS b, (Part 1)

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