Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Test > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q 
Which would be the best choice when selecting a risk free asset for use with the capital asset pricing model?
Select one:
a. 91 day Treasury Bills. 
b. Corporate bonds.
c. Medium dated gilts.
d. Long dated gilts.
A

a. 91 day Treasury Bills.

SEE CHAPTER 3B4

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q 
Shona's fund has a beta of 2.1, therefore her fund has been:
Select one:
a. moderately volatile.
b. less volatile than the market.
c. more volatile than a gilt fund.
d. more volatile than the market.
A

d. more volatile than the market.

SEE CHAPTER 3B1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q 
The standard deviation of a security is 5%. If the mean return is 15%, then future returns will be expected to be within what range 95% of the time?
Select one:
a. 7.5% and 22.5%.
b. 10% and 20%.
c. 5% and 25%.
d. 14% and 16%.
A

c. 5% and 25%.

SEE CHAPTER 3A1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q 
Protecting an existing investment position by taking another position that will increase in value if the existing position falls in value is known as:
Select one:
a. consolidating.
b. correlating. 
c. inversing.
d. hedging.
A

d. hedging.

SEE CHAPTER 3A2A

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Scott has been advised to follow the principles at the core of modern portfolio theory. In terms of his investment portfolio this means that he is looking for:
Select one:
a. a diverse portfolio of imperfectly correlated asset classes.
b. a non-diverse portfolio of imperfectly correlated asset classes.
c. a non-diverse portfolio of perfectly correlated asset classes.
d. a diverse portfolio of perfectly correlated asset classes.

A

a. a diverse portfolio of imperfectly correlated asset classes.

SEE CHAPTER 3A

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Three of the following are important factors which influence security returns. Which is the exception?
Select one:
a. Unanticipated changes in the return of long-term government bonds over Treasury bills.
b. Changes in the default risk premium on bonds.
c. Changes in the expected level of industrial production.
d. Anticipated inflation at outset.

A

d. Anticipated inflation at outset.

SEE CHAPTER 3C1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q 
Ryan has been used to conducting a detailed technical analysis of UK listed companies in his job. Charlotte, his new boss, is keen to move him away from this approach as she thinks it is unnecessary. This would indicate that Charlotte is an exponent of:
Select one:
a. the efficient market hypothesis. 
b. the capital asset pricing model.
c. the arbitrage pricing theory.
d. modern portfolio theory.
A

a. the efficient market hypothesis.

SEE CHAPTER 3D

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q 
When using standard deviation as an indicator, how is the probability of return distributed for an acceptable measure of risk?
Select one:
a. Normal distribution.
b. High distribution.
c. Skewed distribution. 
d. Early distribution.
A

a. Normal distribution.

SEE CHAPTER 3A1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Deborah, an adviser, bases all of her portfolio recommendations on the theory of the efficient frontier. When dealing with her clients, the main differentiating factor for her eventual recommendation will be the maximum:
Select one:
a. costs her clients are willing to pay.
b. level of constraints imposed by her clients.
c. level of risk that her clients are prepared to take.
d. time horizon her clients want to invest for.

A

c. level of risk that her clients are prepared to take.

SEE CHAPTER 3A3

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is NOT a limitation of using the efficient frontier to consider the risks and returns from different types of investment?
Select one:
a. It assumes that systematic risk can be removed.
b. Transaction costs are ignored.
c. Calculations often use historic data.
d. Investors may have constraints and therefore may choose alternative portfolios.

A

a. It assumes that systematic risk can be removed.

SEE CHAPTER 3A3A

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q 
George is utilising beta in order to predict the future return on his portfolio. He is therefore utilising:
Select one:
a. prospect theory.
b. the efficient market hypothesis.
c. the capital asset pricing model. 
d. modern portfolio theory.
A

c. the capital asset pricing model.

SEE CHAPTER 3B2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q 
When security prices adjust to all publicly available information very rapidly and in an unbiased way, this best describes which form of the efficient market hypothesis?
Select one:
a. Semi-weak efficiency.
b. Semi-strong efficiency.
c. Weak form efficiency.
d. Strong form efficiency.
A

b. Semi-strong efficiency.

SEE CHAPTER 3D1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q 
A Treasury bill has a rate of 5% and the expected market return is 8%. What is the market risk premium?
Select one:
a. 9.6%.
b. 3.6%.
c. 3%.
d. 6%.
A

c. 3%.

SEE CHAPTER 3B2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q 
Asset A has decreased by 21.3% and asset B has also decreased in value. Which of the following correlation values COULD be the relationship between the two assets?
Select one:
a. 0.76.
b. 1.2.
c. -1.01.
d. -1.2.
A

a. 0.76.

SEE CHAPTER 3A2C

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q 
George's portfolio was 20% less volatile than the market. This means his portfolio has a:
Select one:
a. beta of 0.2.
b. standard deviation of 0.2.
c. standard deviation of 0.8.
d. beta of 0.8.
A

d. beta of 0.8.

SEE CHAPTER 3B1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q 
The greater the standard deviation around the expected return, the:
Select one:
a. greater the returns.
b. greater the volatility. 
c. lesser the returns.
d. lesser the volatility.
A

b. greater the volatility.

SEE CHAPTER 3A1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q 
Assets A and B have a correlation of -0.6. If A increases by 20%, B will:
Select one:
a. increase by 6%.
b. decrease by 6%. 
c. decrease by 12%.
d. increase by 12%.
A

c. decrease by 12%.

SEE CHAPTER 3A2C

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q 
Paula is a fund manager and she is looking at a wide range of risks when analysing investments, not just systematic risk. She is MOST likely to be using:
Select one:
a. the capital asset pricing model.
b. the arbitrage pricing theory. 
c. modern portfolio theory.
d. correlation.
A

b. the arbitrage pricing theory.

SEE CHAPTER 3C1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Geoff tends to underestimate the likelihood of a bad investment outcome over which he has no control. Paul is frustrated because he keeps selling stocks too early in case they fall in value. Fred is psychologically far more affected by losses than he is to gains. In terms of behavioural finance, which of the following statements is TOTALLY correct regarding these observations?
Select one:
a. Geoff displays overconfidence, Fred displays regret and Paul displays loss aversion.
b. Geoff displays overconfidence, Paul displays regret and Fred displays loss aversion.
c. Paul displays overconfidence, Geoff displays regret and Fred displays loss aversion.
d. Fred displays overconfidence, Paul displays regret and Geoff displays loss aversion.

A

b. Geoff displays overconfidence, Paul displays regret and Fred displays loss aversion.

SEE CHAPTER 3E1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q 
Peter is looking to invest and is considering two different portfolios. He can best measure the volatility risk of each portfolio by its:
Select one:
a. beta.
b. variance. 
c. alpha.
d. standard deviation.
A

d. standard deviation.

SEE CHAPTER 3A1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Two of the variables needed to calculate the expected return of a risky asset using the Capital Asset Pricing Model are:
Select one:
a. beta and variance.
b. beta and standard deviation.
c. standard deviation and the risk free rate of return.
d. beta and the risk free rate of return.

A

d. beta and the risk free rate of return.

SEE CHAPTER 3B2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Bert is using the Fama & French model to try to estimate the required return on his portfolio. In addition to the company’s beta value, the model takes account of:
Select one:
a. changes in gross domestic profit and inflation.
b. changes in interest rates.
c. company size and value.
d. the proportion of high value stocks held.

A

c. company size and value.

SEE CHAPTER 3C

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Axel Investments has a beta of 1.2, and Bold Investments has a beta of 1.4. It is true to say that:
Select one:
a. Axel Investments will always have lower volatility than Bold Investments.
b. both funds will always perform better than the market.
c. both funds are expected to have an inferior performance when compared with the market.
d. Bold Investments is expected to be more volatile than Axel Investments.

A

d. Bold Investments is expected to be more volatile than Axel Investments.

SEE CHAPTER 3B1

24
Q 
The returns from an investment have achieved an average return of 5%. If the investment has a standard deviation of 5%, approximately what percentage of returns are expected to be POSITIVE?
Select one:
a. 16%.
b. 95%. 
c. 68%.
d. 84%.
A

d. 84%.

SEE CHAPTER 3A1

25
Q

Identified as an element of behavioural finance, investors guilty of ‘fear of regret’ will tend to:
Select one:
a. hold on to a falling stock for too long.
b. not invest in asset-backed securities.
c. sell a falling stock too quickly.
d. favour tracker funds.

A

a. hold on to a falling stock for too long.

SEE CHAPTER 3E1B

26
Q

In respect of the capital asset pricing model, a:
Select one:
a. portfolio with a beta of more than one will be expected to underperform the market.
b. portfolio’s beta is not an indicator of the expected return.
c. portfolio with a beta of one will be expected to return the same as the market.
d. portfolio with a beta of less than one will be expected to outperform the market.

A

c. portfolio with a beta of one will be expected to return the same as the market.

SEE CHAPTER 3B1

27
Q 
Mitre Holdings plc has a beta of 1.6. If the expected return on a Treasury bill is 3% and the expected return on the market portfolio is 7.5%, what is the expected return for Mitre Holdings according to the Capital Asset Pricing Model equation?
Select one:
a. 4.8%. 
b. 10.2%.
c. 12%.
d. 10.5%.
A

b. 10.2%.

SEE CHAPTER 3B2

28
Q

Andy and Murray, both rational investors, have portfolios that sit on the efficient frontier. Andy’s portfolio is situated to the left of Murray’s. This is most likely because:
Select one:
a. Andy is more risk averse compared with Murray.
b. Andy needs to obtain higher potential rewards than Murray.
c. Murray is more risk averse compared with Andy.
d. Andy is a contrarian investor.

A

a. Andy is more risk averse compared with Murray.

SEE CHAPTER 3A3

29
Q 
Steph is a proponent of strong-form efficient market hypothesis. This means that she is likely to encourage investments in:
Select one:
a. Equity growth UK funds.
b. Exchange Traded Funds.
c. Equity growth Indian funds.
d. Absolute Return funds.
A

b. Exchange Traded Funds.

SEE CHAPTER 3D2

30
Q

According to the Fama and French multi-factor model, it is UNLIKELY that:
Select one:
a. value stocks will outperform growth stocks.
b. the securities they favour will be more volatile than the market.
c. large cap stocks will outperform small cap stocks.
d. small cap stocks will outperform large cap stocks.

A

c. large cap stocks will outperform small cap stocks.

SEE CHAPTER 3C

31
Q 
According to the efficient market hypothesis (EMH), the LEAST efficient of these markets is:
Select one:
a. large-listed stocks.
b. mid-listed stocks.
c. government bonds. 
d. venture capital.
A

d. venture capital.

SEE CHAPTER 3D2

32
Q 
The Earth Star Fund has a standard deviation of 14 and a beta of 1.3. The return on Treasury bills is 3% and the return on the market is 7%. What is the expected return under the Capital Asset Pricing model?
Select one:
a. 0.29%.
b. 9.1%.
c. 14%.
d. 8.2%.
A

d. 8.2%.

SEE CHAPTER 3B2

33
Q

What is NOT taken into account when calculating the expected return on a risky investment using the Capital Asset Pricing Model?
Select one:
a. Rate of return on a risk-free asset.
b. Standard deviation of the investment.
c. Expected return of the market portfolio.
d. Beta value for the investment.

A

b. Standard deviation of the investment.

SEE CHAPTER 3B2

34
Q

Having at least 15 - 20 randomly selected securities should help eliminate the impact on a portfolio of a:
Select one:
a. change in the fiscal policy of a government.
b. technological breakthrough making a product obsolete.
c. change in the monetary policy of a government.
d. terrorist attack.

A

b. technological breakthrough making a product obsolete.

SEE CHAPTER 3A4

35
Q 
Mike made money on one of his holdings but a loss on the other. Fundamental analysis of the two companies showed them to be as good as each other, but he sells the one making a profit in case it goes down and holds on to the one making a loss in the hope it will go up. Which behavioural bias does this demonstrate?
Select one:
a. Under reaction.
b. Overconfidence.
c. Loss aversion. 
d. Over reaction.
A

c. Loss aversion.

SEE CHAPTER 3E1A

36
Q

According to research, all of the following are important factors that influence security returns, APART from:
Select one:
a. unanticipated inflation.
b. unanticipated changes in short-term interest rates.
c. changes in the expected level of industrial production.
d. changes in the default risk premium on bonds.

A

b. unanticipated changes in short-term interest rates.

SEE CHAPTER 3C1

37
Q

The value of a portfolio of UK equities can be hedged by:
Select one:
a. buying both FTSE 100 future contracts and FTSE 100 put options.
b. selling FTSE 100 futures contracts or buying FTSE 100 put options.
c. selling both FTSE 100 future contracts and FTSE 100 put options.
d. buying FTSE 100 futures contracts or selling FTSE 100 put options.

A

b. selling FTSE 100 futures contracts or buying FTSE 100 put options.

SEE CHAPTER 3A2A

38
Q 
According to the efficient market hypothesis, the MOST efficient market is the:
Select one:
a. large capital stocks market.
b. government bond market.
c. small capital stocks market.
d. corporate bond market.
A

b. government bond market.

SEE CHAPTER 3D2

39
Q 
If the mean return on an investment is 9%, the standard deviation is 4% and the data is normally distributed, then 95% of the returns can be expected to fall between:
Select one:
a. 5% and 13%.
b. 3% and 15%.
c. 1% and 17%. 
d. -3% and 21%.
A

c. 1% and 17%.

SEE CHAPTER 3A1

40
Q 
Johnny follows the principles of modern portfolio theory. If there were assets available offering an equal return, he would therefore choose the asset with:
Select one:
a. the lowest alpha.
b. the lowest standard deviation. 
c. positive correlation.
d. the greatest risk.
A

b. the lowest standard deviation.

SEE CHAPTER 3A1

41
Q

An investment has a beta of 1.2. This means that:
Select one:
a. the performance will be 20% less than the market.
b. it is theoretically 20% more volatile than the market.
c. the performance will be 20% greater than the market.
d. it is theoretically 20% less volatile than the market.

A

b. it is theoretically 20% more volatile than the market.

SEE CHAPTER 3B1

42
Q

Ahmed has been studying the capital asset pricing model equation. Which variable would NOT form part of this equation?
Select one:
a. The return generated from the risk free asset.
b. Alpha.
c. Beta.
d. The expected return of the market.

A

b. Alpha.

SEE CHAPTER 3B2

43
Q

Zoe is reviewing two investments: Investment A has a standard deviation of 2 and Investment B has a standard deviation of 5. It is TRUE to say that:
Select one:
a. the returns from Investment A must be higher.
b. Investment A has been less volatile.
c. the returns from Investment B must be higher.
d. Investment B has been less volatile.

A

b. Investment A has been less volatile.

SEE CHAPTER 3A1

44
Q 
Bridget owns a mixture of equities and corporate bond investments. She is seeking investments with no correlation to these assets as far as possible. The MOST likely way she could achieve this would be to invest in:
Select one:
a. the FTSE 100.
b. gilts.
c. more convertible bonds.
d. cash deposits.
A

d. cash deposits.

SEE CHAPTER 3A2C

45
Q 
ZYX Plc is regarded in its market as an 'aggressive security'. As a result, its beta would most likely be:
Select one:
a. 1.
b. 1.8. 
c. 1.1.
d. 0.8.
A

b. 1.8.

SEE CHAPTER 3B1

46
Q

Which of these events would be described as an example of market risk?
Select one:
a. A technological breakthrough making an existing product obsolete.
b. A new competitor beginning to offer a very similar product.
c. The UK government changing corporation tax rates.
d. A company being downgraded by a credit rating agency.

A

c. The UK government changing corporation tax rates.

SEE CHAPTER 3A4

47
Q

Julie owns a portfolio of UK equities and has been advised to sell FTSE 100 future contracts. What would be the purpose of this advice?
Select one:
a. To help Julie achieve the maximum possible return.
b. To help Julie hedge her portfolio.
c. To add positively correlated assets to her portfolio.
d. To ensure Julie will achieve positive alpha.

A

b. To help Julie hedge her portfolio.

SEE CHAPTER 3A2A

48
Q 
Ivan believes that fund managers do not add any value to the performance of a fund. His beliefs would be MOSTLY linked to:
Select one:
a. modern portfolio theory.
b. the efficient market hypothesis.
c. behavioural finance.
d. correlation analysis.
A

b. the efficient market hypothesis.

SEE CHAPTER 3D

49
Q

It might it be appropriate for Roger, an investor, to use the efficient frontier to plot the optimum portfolio for him because:
Select one:
a. he is happy to match the return achieved by tracker funds.
b. he is inexperienced and has never invested in the past.
c. he wants know the lowest level of return he can expect to achieve by taking a higher risk.
d. he wants to know the lowest level of risk he can afford to take to achieve a given expected return.

A

d. he wants to know the lowest level of risk he can afford to take to achieve a given expected return.

SEE CHAPTER 3A3

50
Q 
n investment has achieved an average return of 6% with a standard deviation of 2%. Statistically, what percentage of returns will be expected to fall OUTSIDE the range of 2% to 10%?
Select one:
a. Roughly 32%.
b. Roughly 68%.
c. Roughly 5%.
d. Roughly 95%.
A

c. Roughly 5%.

SEE CHAPTER 3A1

51
Q

Donna wishes to hedge her equity portfolio against a fall in the market in the next few months. Which strategy would NOT result in a reduction of market risk?
Select one:
a. Selling an equity futures contract.
b. Diversifying into other asset classes with a negative correlation to equities.
c. Buying put options.
d. Buying an equity futures contract.

A

d. Buying an equity futures contract.

SEE CHAPTER 3A2

52
Q

Gina holds shares in a number of UK companies. Which event would be an example of a systematic risk?
Select one:
a. A scandal involving the Chief Executive of one of her holdings.
b. A strike over pay and conditions at one of the companies she owns shares in.
c. A change in credit rating of one of the companies she owns shares in.
d. An increase in UK unemployment.

A

d. An increase in UK unemployment.

SEE CHAPTER 3A4

53
Q

The efficient market hypothesis states that security prices will only move significantly when:
Select one:
a. the economy is moving out of a recession.
b. inflation is rising.
c. new information becomes available.
d. interest rates are falling.

A

c. new information becomes available.

SEE CHAPTER 3D

54
Q 
According to the capital asset pricing model, what is the expected return for a share with a beta of 1.5, if the expected return on a Treasury bill is 4% and the expected return on the market portfolio is 7%?
Select one:
a. 10.5%.
b. 8.5%. 
c. 11%.
d. 6%.
A

b. 8.5%.

SEE CHAPTER 3B2

55
Q 
Using the capital asset pricing model, what is the expected return for a share with a beta of 1.4, if the expected return on a Treasury bill is 3% and the expected return on the market portfolio is 7.5%?
Select one:
a. 6.3%.
b. 3.5%. 
c. 7.5%.
d. 9.3%.
A

d. 9.3%.

SEE CHAPTER 3B2

56
Q 
An investment has a mean return of 7% and a standard deviation of 3%. Roughly 95% of its returns will fall between:
Select one:
a. 4% and 10%.
b. 7% and 13%.
c. -2% and 16%.
d. 1% and 13%.
A

d. 1% and 13%.

SEE CHAPTER 3A1

Test (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions