Asset Allocation and Portfolio Diversification

Question 1

The purpose of ___________________ is to choose an appropriate asset allocation
based on forecasts of the economy, expectations of selected asset classes, and the client’s risk tolerance.

Answer 1

strategic asset allocation

Question 2

__________________ refers to changing the mix of investment classes based on changing market conditions. Often referred to as market timing

Answer 2

Tactical asset allocation

Question 3

Tactical asset allocation may generate ___________________________ from constantly changing the mix between asset classes

Answer 3

high transaction and turnover costs (e.g., taxes and commissions)

Question 4

An investment strategy investing in both broad market indexes and higher-risk alternatives

Answer 4

core and satellite

Question 5

Portfolios MAY/MAY NOT exist above the efficient frontier

Answer 5

May Not

b/c the efficient frontier consist of the most efficient portfolios, anything above the line is unattainable

Question 6

The expected rate of return generated by the ___________ may be compared to the investor’s required rate of return to determine whether the investor should purchase (or sell) the investment

Answer 6

CAPM

Question 7

The _______ is a broad or macro perspective of the risk-return relationship, while the more common ______ has the versatility to be used with portfolios and individual securities.

Answer 7

1. CML
2. SML

Question 8

The SML uses _______ as a risk measure, whereas the CML uses ________.

Answer 8

1. Beta
2. Std Dev

Question 9

Securities with CAPM expected returns above the SML are __________ as they provide a higher expected return for the same level of risk (beta) as repre-sented on the SML

Answer 9

Undervalued

Question 10

Securities with CAPM expected returns below the SMA are ___________ as they provide a lower expected return for the same level of risk (beta) as repre-sented on the SML

Answer 10

Overvalued

Question 11

__________ attempts to explain return expectations in terms of multiple factors or variables. _______explains the returns on stock as a result of only one factor.

Answer 11

1. Arbitrage pricing theory
2. CAPM

Question 12

This theory suggests that investors are unable to outperform the market on a consistent basis without accepting additional risk

Answer 12

Efficient Market Hypothesis

Question 13

The basic assumption of ________ is that current stock prices reflect all available information for a company and that the prices rapidly adjust to reflect any new information

Answer 13

EMH

Since the market’s efficiency in valuing securities is extremely quick and accurate, investors are not able to find undervalued stocks on a consistent basis

Question 14

____________ form of EMH holds that current stock prices have already incorporated all historical market data, such as prices, trading volume, and published financial information

Answer 14

weak form

Question 15

Fundamental analysis and insider information may produce above-market returns under the _____ form of EMH

Answer 15

weak form

Question 16

_________ form of EMH holds that the current stock price not only reflects all past historical price data but also data from analyzing financial statements, industry, or current economic outlook

Answer 16

semistrong

Question 17

Insider information may produce superior returns under the _____ form of EMH

Answer 17

semistrong

Question 18

This form suggests that many analysts follow the same stock and that any new information will be quickly incorporated into the current price. Thus, even fundamental analysis is not likely to yield above-market returns.

Answer 18

semistrong

Question 19

Holds that stock prices reflect all public information and most private (insider) information. Therefore, even traders using inside information are unlikely to consistently outperform the market.

Answer 19

the strong form

Question 20

Technical analysis, fundamental analysis, and insider information will not allow investors to achieve consistently superior performance under the ______ form

Answer 20

strong form

Question 21

_________are unexpected market results or trends that tend to contradict the EMH.

Answer 21

Anomalies

Question 22

The ___________ effect relates to the number of analysts that follow smaller-size companies. This neglect permits investors to find bargain-priced stocks and ultimately earn superior returns

Answer 22

small firm effect

Question 23

The _____________ ratio effect suggests that higher returns are attainable with portfolios consisting of securities with low ratios

Answer 23

price-to-earnings

Question 24

Options can be used to create a ______ around the value of the stock. For example, writing a call option on a stock can generate premium to pay for the premium on a put option.

Answer 24

Collar

This type of arrangement is generally referred to as a zero-cost collar because there is no cost to the investor; however, the option contracts will expire and the collar would have to be put back in place after expiration

Question 25

A ________-weighted index is an index in which the value of the index is equal to the sum of the prices of the securities in the index, divided by a pre-determined divisor

Answer 25

Price

Question 26

Underwriter purchases the entire issue of securities at a specified price and resells at a higher price (markup) with __________ underwriting

Answer 26

Firm commitment

Question 27

Underwriter purchases securities remaining after an initial offering (usually to existing shareholders/owners) at a predetermined price
with __________ underwriting

Answer 27

Standby underwriting

Question 28

Underwriter, acting as an agent, sells as much of the issue as possible; remainder returns to the issuing company with __________ underwriting

Answer 28

best-efforts

Question 29

Order type that is executed immediately and has the highest priority

Answer 29

market order

Question 30

order to purchase security at or below specified price or to sell security at or above a specified price

Answer 30

Limit order

Question 31

—an order to create a market order if the price of the security reaches a specified level. Used to protect investors from large losses

Answer 31

Stop order

Question 32

an order to create a limit order if the price of the security reaches a specified level. Least often used type of order

Answer 32

Stop Limit order