Q&A Hero

Q: Common stock investments that do not pay dividends are likely to provide relatively low total returns.

Q: Real estate is a good example of an investment that lacks liquidity.

Q: An aggressive portfolio might include real assets.

Q: Investors desiring to assume low risks would probably invest in short-term securities.

Q: Common stock is a good example of an investment that lacks liquidity.

Q: Risk is not correlated with return in the capital markets.

Q: A lack of immediate liquidity cannot be justified even if there is an opportunity for large gains.

Q: A public utility is likely to appeal to an income-oriented, conservative investor.

Q: In the financial world, risk is defined as variability of returns.

Q: Real estate may be favored by investors in high tax brackets.

Q: A share in a money market fund is an indirect equity claim.

Q: Most financial assets provide a high degree of liquidity.

Q: Silver is an example of a financial asset.

Q: Common stock represents a direct equity claim.

Q: Those who engage in short-term market tactics are considered traders.

Q: Investment is the commitment of current funds in anticipation of receiving a larger flow of funds in the future.

Q: Real assets tend to be more liquid than financial assets.

Q: Liquidity refers to how little the sales price of an asset has decreased from its cost.

Q: The only compensation anticipated from an investment is for inflation protection.

Q: In general, inflation results in a loss of purchasing power to the investor.

Q: Dividends and long-term capital gains are now taxed at the same maximum rate.

Q: To achieve maximum diversification benefits, an investor should invest in projects which are highly correlated.

Q: Pension funds are a form of indirect equity claims.

Q: Diamonds represent a form of real assets, but cattle do not.

Q: Warrants are a form of direct equity claims.

Q: Commodity futures are a form of financial asset.

Q: Mutual funds are a form of direct equity claims.

Q: It is generally thought that young, upwardly mobile people should take less risk than elderly people living on a fixed income.

Q: Rare paintings and baseball cards may be considered as forms of investment.

Q: In an efficient and informed capital market environment, those investments with the greatest return tend to have the greatest risk.

Q: The age and economic circumstances of an investor are important variables in determining an appropriate level of risk.

Q: The Tax Act of 2003 offers greater potential for wealth accumulation.

Q: A firm that evaluates portfolios uses the Sharpe approach to measuring performance. How would it rank these three portfolios? What percent of funds under management should be invested in stocks, bonds, and the like?

Q: Diversification is the process of determining the risk premium.

Q: The Brinson, Hood, and Beebower (BHB) study indicated that asset managers are more likely to lose their jobs because of poor _____________ rather than poor _________. A.asset allocation; stock selection B.stock selection; asset allocation C.customer relations; performance D.performance; customer relations

Q: Asset allocation represents an attempt by individuals or portfolio managers to determine what? A.percentage of assets should be distributed to beneficiaries. B.mutual funds are appropriate for investment based on risk and return. C.percent of funds under management should be invested in stocks, bonds, and the like. D.brokerage houses best meet their needs.

Q: The Ibbotson study showed that high-risk investments generate high returns.

Q: Benchmark portfolios are used to: A.ensure compliance with government regulations. B.enhance the return on portfolios. C.reduce risk through careful hedging strategies. D.measure and compare the performance of portfolio managers.

Q: Unlike the risk-free rate, the level of the risk premium varies by investment.

Q: In an index fund, A.returns are adjusted for changes in the consumer price index. B.funds are invested in a mutual fund that attempts to replicate the performance of a major market index. C.investors are guaranteed returns equal to a major market index. D.high commissions and management fees are charged because of attempts to beat the market.

Q: The riskiness of an investment is measured by the dispersion of possible outcomes.

Q: A firm with an alpha of .5: A.has performed half as well as the market. B.has performed above the market line. C.has performed below the market line. D.is likely to have a high beta.

Q: According to numerous studies conducted by various professors, portfolio managers generally: A.outperform the market on a risk-adjusted basis. B.perform the same as the market in terms of risk-adjusted returns. C.under-perform the market. D.greatly outperform the market on a risk-adjusted basis.

Q: An investor can totally eliminate time-consuming investment management activities by participating in a mutual fund or limited partnership.

Q: Excess returns are equal to the: A.total portfolio return minus the beta. B.total portfolio return minus the return on the S&P 500. C.total portfolio return minus the risk-free rate. D.total portfolio return minus the standard deviation.

Q: Which of the following is the final measure used to evaluate a portfolio manager's performance using the Jensen approach? A.Alpha ONLY B.Alpha and the standard deviation C.Standard deviation D.None of the above

Q: Fund managers normally compare their performance to: A.a benchmark portfolio. B.Moody's Bond ratings. C.the Barron's Confidence Index. D.None of the above

Q: The measure of performance defined as the difference between a fund's excess return and a point on the market line corresponding to the fund's beta is called: A.alpha. B.average differential return. C.the Jensen measure. D.More than one of the above

Q: The degree of association between the independent and dependant variables is measured by: A.the beta. B.the standard deviation. C.the coefficient of determination. D.A and B

Q: Under the Jensen approach, if the market rate of excess returns is 5.75%, a portfolio with beta of .9 should provide excess returns of: A.5.175%. B.4.5%. C.5%. D.There is not enough information to tell

Q: In examining the performance of fund managers, the return measure commonly used is: A.the standard deviation. B.the beta. C.excess returns. D.total returns.

Q: If the portfolio return is 10%, and the U.S. T-bill rate is 5.75%, what is the Treynor measure of excess returns? A..4250 B..0425 C..7391 D.There is not enough information to tell

Q: The only difference between the Sharpe and Treynor approaches is that the Treynor approach evaluates excess returns based on: A.total risk. B.unsystematic risk. C.systematic risk. D.None of the above

Q: The best way to measure adherence to the objectives of money managers and the financial needs of investors is: A.to calculate the total returns on the portfolios that they manage. B.to evaluate the risk exposure that the fund manager has accepted. C.to calculate the dividend income that the portfolio has achieved. D.to calculate the capital gains that the portfolio has achieved.

Q: The Sharpe measure on a portfolio which earns 12%, with a standard deviation of 30%, and beta of 1.27, is: A..40. B..094. C..508. D.There is not enough information

Q: Asset allocation is generally ________________ stock selection. A.less important than B.more important than C.of equal importance to D.none of the above are true

Q: A mutual fund with excess returns very similar to those of the market will have an R2 (coefficient of determination) of: A.slightly less than 1. B.slightly greater than 1. C.greater than or less than one. D.There is not enough information to tell

Q: Under the _____ approach, excess returns on a portfolio are compared to the total risk of the portfolio. A.Sharpe B.Treynor C.Jensen D.More than one of the above

Q: A positive alpha is an indication of: A.low risk. B.high risk. C.superior performance. D.low diversification.

Q: The term excess returns is commonly defined as: A.total portfolio returns, minus the market rate. B.total portfolio returns, minus the risk-free rate. C.(portfolio returns minus the risk-free rate) divided by beta. D.None of the above

Q: The least risk exposure would be appropriate for a mutual fund which: A.generates income for investors living on a fixed income. B.is oriented toward capital gains for wealthy investors. C.is designed for young, upwardly mobile professionals. D.None of the above

Q: According to a study by John McDonald published in the Journal of Financial and Quantitative Analysis, portfolio managers generally: A.follow the objectives initially set for the portfolio. B.set objectives for the portfolio but don't follow them. C.have difficulty following the portfolio objectives. D.None of the above

Q: One primary reason for the long-term average performance of mutual funds in general is: A.inflation. B.high transaction costs. C.volatile stock market conditions. D.None of the above

Q: Professional money managers may be evaluated based on: A.their adherence to stated objectives. B.their ability to efficiently diversify the portfolio. C.their return, relative to degree of risk. D.All of the above

Q: Over 20-year rolling periods, the worst performance by small company stocks was positive, according to Ibbotson and Associates.

Q: Under what conditions might a return of 15% be actually worse than a return of 10%? A.In a bull market B.In a bear market C.On a risk-adjusted basis D.More than one of the above

Q: Asset managers typically lose their jobs because of poorly allocated portfolios under a given market condition.

Q: Most funds show a positive performance compared to a market average.

Q: Alpha must always be a positive number.

Q: Using the Jensen approach, the adequacy of a portfolio manager's performance cannot be judged against the market line.

Q: Buying a mutual fund is a good way to diversify.

Q: Adherence to objectives as measured by risk exposure is important in evaluating a fund manager because risk is one of the variables a money manager can directly control.

Q: The relationship between excess returns and the portfolio beta is represented by the market line.

Q: Jensen uses alpha as a measure of performance.

Q: Most law suits against fund managers are for poor performance in terms of return.

Q: To achieve effective diversification, a fund must have 80 to 100 different securities.

Q: A fund manager has almost total control over the beta of his portfolio.

Q: Most funds' performance in terms of R2 is poor.

Q: The Jensen study indicates that mutual fund managers tend to have very superior performances.

Q: R2 is a good measure of efficient diversification.