Question 1

It does not make economic sense for portfolio managers to try to "time" between different investment styles.

Accepted Answer

A) True 
 B)False  False

Question 2

An investor focusing on a growth strategy does all of the following except:

Accepted Answer

A)  Focuses on the earnings per share (EPS) component on the P/E ratio 
B)  Seek out investments with higher expected growth in earnings. 
C)  Implicitly assume that the P/E ratio will grow over the near term. 
D)  Focuses on the current and future economic "story" of a company. 
E)  All of the above statements are true. 
A)  Focuses on the earnings per share (EPS) component on the P/E ratio 
B)  Seek out investments with higher expected growth in earnings. 
C)  Implicitly assume that the P/E ratio will grow over the near term. 
D)  Focuses on the current and future economic "story" of a company. 
E)  All of the above statements are true. C

Question 3

A contrarian investment strategy is based on the belief that

Accepted Answer

A)  Stock returns are mean reverting. 
B)  The best time to buy is when other investors are bullish. 
C)  Rising stocks will continue to rise. 
D)  Passive management is preferred to active management. 
E)  A long/short portfolio will outperform a long only portfolio. 
A)  Stock returns are mean reverting. 
B)  The best time to buy is when other investors are bullish. 
C)  Rising stocks will continue to rise. 
D)  Passive management is preferred to active management. 
E)  A long/short portfolio will outperform a long only portfolio. A

Question 4

In ____ asset allocation, the investor's risk tolerance and constraints are assumed to be constant over time. However, changes in capital market conditions result in changes in the portfolio's stock-bond mix.

Accepted Answer

A)  Integrated 
B)  Strategic 
C)  Tactical 
D)  Insured 
E)  None of the above. 
A)  Integrated 
B)  Strategic 
C)  Tactical 
D)  Insured 
E)  None of the above.

Question 5

Which of the following is considered a strategy for timing the market and adding value to actively managed portfolios?

Accepted Answer

A)  Time the markets by shifting between different types of securities based on market forecasts and estimated risk premiums. 
B)  Shift funds between the various equity sectors, industries, investment styles, etc., in order to take advantage of the "hot" concept before the remainder of the market does. 
C)  Individual stockpicking in order to buy low and sell high. 
D)  Choices a and b only 
E)  All of the above 
A)  Time the markets by shifting between different types of securities based on market forecasts and estimated risk premiums. 
B)  Shift funds between the various equity sectors, industries, investment styles, etc., in order to take advantage of the "hot" concept before the remainder of the market does. 
C)  Individual stockpicking in order to buy low and sell high. 
D)  Choices a and b only 
E)  All of the above

Question 6

Growth oriented investors focus on the price component of the Price/Earnings ratio.

Accepted Answer

A) True 
 B)False

Question 7

Exhibit 15-1
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
A portfolio manager is trying to establish a strategic asset allocation for two different clients, Bob Bowman and Tom Luck. Bob Bowman has a risk tolerance factor of 22 and Tom Luck has a risk tolerance factor of 6. The characteristics of the three model portfolios under consideration are provided in the table below. $$\begin{array}{c}
\underline {\text { Asset Mix }}\quad\quad\quad\quad\quad\quad\
\begin{array} { c c c c c } 
\text { Partfalia } & \text { Stack } & \text { Bond } & \begin{array} { c } 
\text { Exgected } \
\text { Retun }
\end{array} & \text { Variance } \
\hline \text { A } & 0.75 & 0.25 & 0.12 & 0.45 \
\text { B } & 0.4 & 0.6 & 0.08 & 0.16 \
\text { C } & 0.3 & 0.7 & 0.05 & 0.06
\end{array}
\end{array}$$
-Refer to Exhibit 15-1. The expected utilities of Portfolios A, B and C for Tom Luck are

Accepted Answer

A)  Portfolio A = 9.95, Portfolio B = 7.27, Portfolio C = 4.73 
B)  Portfolio A = 4.5, Portfolio B = 5.33, Portfolio C = 4.0 
C)  Portfolio A = 7.95, Portfolio B = 5.33, Portfolio C = 4.73 
D)  Portfolio A = 3.5, Portfolio B = 7.27, Portfolio C = 4.73 
E)  Portfolio A = 5.33, Portfolio B = 7.27, Portfolio C = 6.75 
A)  Portfolio A = 9.95, Portfolio B = 7.27, Portfolio C = 4.73 
B)  Portfolio A = 4.5, Portfolio B = 5.33, Portfolio C = 4.0 
C)  Portfolio A = 7.95, Portfolio B = 5.33, Portfolio C = 4.73 
D)  Portfolio A = 3.5, Portfolio B = 7.27, Portfolio C = 4.73 
E)  Portfolio A = 5.33, Portfolio B = 7.27, Portfolio C = 6.75

Question 8

Sharpe (1991) study reveals that active managers typically outperform passive managers even after transaction costs and fees.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is false?

Accepted Answer

A)  A manager's choice to align with an investment style communicates information to clients about the investor's focus, area of expertise, and stock evaluation methods. 
B)  An investment manager's style cannot be used as a basis for measuring the manager's performance relative to a benchmark. 
C)  Style identification allows an investor to select investment managers that allow his overall portfolio to be properly diversified. 
D)  Style investing allows control of the total portfolio to be shared between the investment managers and a knowledgeable sponsor. 
E)  None of the above (all are true statements) 
A)  A manager's choice to align with an investment style communicates information to clients about the investor's focus, area of expertise, and stock evaluation methods. 
B)  An investment manager's style cannot be used as a basis for measuring the manager's performance relative to a benchmark. 
C)  Style identification allows an investor to select investment managers that allow his overall portfolio to be properly diversified. 
D)  Style investing allows control of the total portfolio to be shared between the investment managers and a knowledgeable sponsor. 
E)  None of the above (all are true statements)

Question 10

A Long futures positions in the S&P500 has the effect of ____ portfolio exposure to equities, while short futures positions in the S&P500 has the effect of ____ portfolio exposure to equities.

Accepted Answer

A)  Increasing, decreasing. 
B)  Decreasing, increasing, 
C)  Increasing, increasing. 
D)  Decreasing, decreasing. 
E)  None of the above. 
A)  Increasing, decreasing. 
B)  Decreasing, increasing, 
C)  Increasing, increasing. 
D)  Decreasing, decreasing. 
E)  None of the above.

Question 11

An advantage of quadratic programming is that it relies on historical correlations.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is not a technique for constructing a passive index portfolio?

Accepted Answer

A)  Full replication 
B)  Sampling 
C)  Quadratic programming 
D)  Linear programming 
E)  None of the above (that is, all are techniques for constructing a passive index portfolio) 
A)  Full replication 
B)  Sampling 
C)  Quadratic programming 
D)  Linear programming 
E)  None of the above (that is, all are techniques for constructing a passive index portfolio)

Question 13

Style investing involves constructing portfolios in such a way to capture one or more of the characteristics of equity securities.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements concerning active equity portfolio management strategies is true?

Accepted Answer

A)  The goal of active equity portfolio management is to earn a portfolio return that exceeds the return of a passive benchmark portfolio (net of transaction costs) on a risk-adjusted basis. 
B)  An actively managed equity portfolio has lower total transaction costs. 
C)  An actively managed equity portfolio has lower risk than the passive benchmark. 
D)  A key to success for an actively managed equity portfolio is to maximize trading activity. 
E)  All of the above. 
A)  The goal of active equity portfolio management is to earn a portfolio return that exceeds the return of a passive benchmark portfolio (net of transaction costs) on a risk-adjusted basis. 
B)  An actively managed equity portfolio has lower total transaction costs. 
C)  An actively managed equity portfolio has lower risk than the passive benchmark. 
D)  A key to success for an actively managed equity portfolio is to maximize trading activity. 
E)  All of the above.

Question 15

The asset allocation strategy that separately examines capital market conditions and the investor's objectives and constraints is called

Accepted Answer

A)  Integrated asset allocation. 
B)  Tactical asset allocation. 
C)  Sector rotation. 
D)  Strategic asset allocation. 
E)  Insured asset allocation. 
A)  Integrated asset allocation. 
B)  Tactical asset allocation. 
C)  Sector rotation. 
D)  Strategic asset allocation. 
E)  Insured asset allocation.

Question 16

The goal of a passive portfolio is to track the index as closely as possible.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is not considered a mainstream investment style?

Accepted Answer

A)  Value 
B)  Growth 
C)  Market-oriented 
D)  Benchmark 
E)  Small-cap 
A)  Value 
B)  Growth 
C)  Market-oriented 
D)  Benchmark 
E)  Small-cap

Question 18

In equity portfolio management, tracking error occurs when

Accepted Answer

A)  The managed portfolio outperforms the benchmark portfolio. 
B)  The managed portfolio under performs the benchmark portfolio. 
C)  The return volatility of the managed portfolio is positively correlated with the return volatility of the benchmark portfolio. 
D)  The return volatility of the managed portfolio is negatively correlated with the return volatility of the benchmark portfolio. 
E)  The return volatility of the managed portfolio is not correlated with the return volatility of the benchmark portfolio. 
A)  The managed portfolio outperforms the benchmark portfolio. 
B)  The managed portfolio under performs the benchmark portfolio. 
C)  The return volatility of the managed portfolio is positively correlated with the return volatility of the benchmark portfolio. 
D)  The return volatility of the managed portfolio is negatively correlated with the return volatility of the benchmark portfolio. 
E)  The return volatility of the managed portfolio is not correlated with the return volatility of the benchmark portfolio.

Question 19

Which of the following is not considered an active management strategy?

Accepted Answer

A)  Sector rotation 
B)  Use of factor models 
C)  Quantitative screens 
D)  Full replication 
E)  Linear programming 
A)  Sector rotation 
B)  Use of factor models 
C)  Quantitative screens 
D)  Full replication 
E)  Linear programming

Question 20

A fundamental tenet of the contrarian investment strategy is the notion that

Accepted Answer

A)  All stock returns are mean reverting. 
B)  Certain stocks outperform others during different stages of the business cycle. 
C)  Value stock investing is superior to growth stock investing. 
D)  Growth stock investing is superior to value stock investing. 
E)  None of the above. 
A)  All stock returns are mean reverting. 
B)  Certain stocks outperform others during different stages of the business cycle. 
C)  Value stock investing is superior to growth stock investing. 
D)  Growth stock investing is superior to value stock investing. 
E)  None of the above.

Exam 15: Equity Portfolio Management Strategies

It does not make economic sense for portfolio managers to try to "time" between different investment styles.

An investor focusing on a growth strategy does all of the following except:

A contrarian investment strategy is based on the belief that

In ____ asset allocation, the investor's risk tolerance and constraints are assumed to be constant over time. However, changes in capital market conditions result in changes in the portfolio's stock-bond mix.

Which of the following is considered a strategy for timing the market and adding value to actively managed portfolios?

Growth oriented investors focus on the price component of the Price/Earnings ratio.

Sharpe (1991) study reveals that active managers typically outperform passive managers even after transaction costs and fees.

Which of the following statements is false?

A Long futures positions in the S&P500 has the effect of ____ portfolio exposure to equities, while short futures positions in the S&P500 has the effect of ____ portfolio exposure to equities.

An advantage of quadratic programming is that it relies on historical correlations.

Which of the following is not a technique for constructing a passive index portfolio?

Style investing involves constructing portfolios in such a way to capture one or more of the characteristics of equity securities.

Which of the following statements concerning active equity portfolio management strategies is true?

The asset allocation strategy that separately examines capital market conditions and the investor's objectives and constraints is called

The goal of a passive portfolio is to track the index as closely as possible.

Which of the following is not considered a mainstream investment style?

In equity portfolio management, tracking error occurs when

Which of the following is not considered an active management strategy?

A fundamental tenet of the contrarian investment strategy is the notion that

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters

A Long futures positions in the S&P500 has the effect of portfolio exposure to equities, while short futures positions in the S&P500 has the effect of portfolio exposure to equities.