Question 1

With dollar-cost averaging a manager purchases fewer shares when stock prices are low and more shares when stock prices are high.

Accepted Answer

A) True 
 B)False

Question 2

The following are examples of a fundamental active equity portfolio management strategy.

Accepted Answer

A)  Contrarian investing. 
B)  Earnings momentum investing. 
C)  Low P/E and low P/BV investing. 
D)  Bottom up investing. 
E)  Investing on the basis of calendar effects. 
A)  Contrarian investing. 
B)  Earnings momentum investing. 
C)  Low P/E and low P/BV investing. 
D)  Bottom up investing. 
E)  Investing on the basis of calendar effects.

Question 3

Tracking error is defined as the degree to which the portfolio's returns deviate from those of the actual index.

Accepted Answer

A) True 
 B)False

Question 4

Completeness funds are portfolios designed to complement active portfolios that do not cover the entire market.

Accepted Answer

A) True 
 B)False

Question 5

Active equity portfolio management is a long-term buy-and-hold strategy.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements regarding 130/30 strategies is false?

Accepted Answer

A)  Analyst can make full use of their knowledge of undervalued and overvalued stocks. 
B)  Long positions up to 130% of the value of the portfolio cab be made. 
C)  Short positions up to 30% of the value of the portfolio can be made. 
D)  130/30 strategies are not very popular due to the increased risk of hedging. 
E)  The use of short positions creates leverage. 
A)  Analyst can make full use of their knowledge of undervalued and overvalued stocks. 
B)  Long positions up to 130% of the value of the portfolio cab be made. 
C)  Short positions up to 30% of the value of the portfolio can be made. 
D)  130/30 strategies are not very popular due to the increased risk of hedging. 
E)  The use of short positions creates leverage.

Question 7

Following an earnings momentum strategy, an investor acquires stocks that have enjoyed above-market stock price increases.

Accepted Answer

A) True 
 B)False

Question 8

An advantage of sampling is that portfolio returns will not track the index as closely as with full replication.

Accepted Answer

A) True 
 B)False

Question 9

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 Bob Bowman 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 = 4.73 
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 = 4.73

Question 10

In backtesting, computers are used to examine the composition and returns of portfolios based on historical data in order to determine if the investment strategy would have worked in the past.

Accepted Answer

A) True 
 B)False

Question 11

A benchmark portfolio is defined as a passive portfolio whose average characteristics match the client's risk-return objectives.

Accepted Answer

A) True 
 B)False

Question 12

Style identification allows an investor to select investment managers that allow his overall portfolio to be properly diversified.

Accepted Answer

A) True 
 B)False

Question 13

Growth stocks would have the following characteristics

Accepted Answer

A)  Low price/book, high price/earnings. 
B)  Low price/book, low price/earnings. 
C)  High EPS growth, high profitability. 
D)  Low EPS growth, high profitability. 
E)  None of the above. 
A)  Low price/book, high price/earnings. 
B)  Low price/book, low price/earnings. 
C)  High EPS growth, high profitability. 
D)  Low EPS growth, high profitability. 
E)  None of the above.

Question 14

There is a direct relationship between a passive portfolio's tracking error relative to its index and the time and expense necessary to create and maintain the portfolio.

Accepted Answer

A) True 
 B)False

Question 15

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 recommended portfolio for Tom Luck is

Accepted Answer

A)  Portfolio A because it has expected utility of 9.95 
B)  Portfolio A because it has expected utility of 4.5 
C)  Portfolio B because it has expected utility of 5.33 
D)  Portfolio B because it has expected utility of 7.27 
E)  Portfolio C because it has expected utility of 6.75 
A)  Portfolio A because it has expected utility of 9.95 
B)  Portfolio A because it has expected utility of 4.5 
C)  Portfolio B because it has expected utility of 5.33 
D)  Portfolio B because it has expected utility of 7.27 
E)  Portfolio C because it has expected utility of 6.75

Question 16

Which of the following statements regarding momentum strategies is true?

Accepted Answer

A)  Price momentum is a fundamental strategy. 
B)  Earnings momentum is a technical strategy. 
C)  Price momentum and earnings momentum strategies will often result in identical portfolio strategies and holdings. 
D)  The earnings momentum investor will most likely acquire stocks for companies that have positive earnings surprises. 
E)  All of the above statements are true 
A)  Price momentum is a fundamental strategy. 
B)  Earnings momentum is a technical strategy. 
C)  Price momentum and earnings momentum strategies will often result in identical portfolio strategies and holdings. 
D)  The earnings momentum investor will most likely acquire stocks for companies that have positive earnings surprises. 
E)  All of the above statements are true

Question 17

Exchange-Traded Funds (ETF) are depository receipts that give investors a pro rata claim on the capital gains and cash flows of securities held by financial institutions.

Accepted Answer

A) True 
 B)False

Question 18

If the annual geometric mean for the equity risk premium is 8.4%, what percentage of the equity risk premium is consumed by trading costs of 1.2%?

Accepted Answer

A)  7.20% 
B)  9.60% 
C)  9.70% 
D)  10.08% 
E)  14.29% 
A)  7.20% 
B)  9.60% 
C)  9.70% 
D)  10.08% 
E)  14.29%

Question 19

Exchange traded funds

Accepted Answer

A)  Are exactly the same as index mutual funds 
B)  Can be bought and sold like common stocks 
C)  Can be sold short. 
D)  Choices a and b. 
E)  Choices b and c. 
A)  Are exactly the same as index mutual funds 
B)  Can be bought and sold like common stocks 
C)  Can be sold short. 
D)  Choices a and b. 
E)  Choices b and c.

Question 20

____ is a strategy used because the market seems to reward companies that have steady, above average earnings growth, or whose prices are rising because of market optimism.

Accepted Answer

A)  Relative strength 
B)  Asset momentum 
C)  Rotational attribution 
D)  All of the above. 
E)  None of the above. 
A)  Relative strength 
B)  Asset momentum 
C)  Rotational attribution 
D)  All of the above. 
E)  None of the above.

Exam 15: Equity Portfolio Management Strategies

With dollar-cost averaging a manager purchases fewer shares when stock prices are low and more shares when stock prices are high.

The following are examples of a fundamental active equity portfolio management strategy.

Tracking error is defined as the degree to which the portfolio's returns deviate from those of the actual index.

Completeness funds are portfolios designed to complement active portfolios that do not cover the entire market.

Active equity portfolio management is a long-term buy-and-hold strategy.

Which of the following statements regarding 130/30 strategies is false?

Following an earnings momentum strategy, an investor acquires stocks that have enjoyed above-market stock price increases.

An advantage of sampling is that portfolio returns will not track the index as closely as with full replication.

In backtesting, computers are used to examine the composition and returns of portfolios based on historical data in order to determine if the investment strategy would have worked in the past.

A benchmark portfolio is defined as a passive portfolio whose average characteristics match the client's risk-return objectives.

Style identification allows an investor to select investment managers that allow his overall portfolio to be properly diversified.

Growth stocks would have the following characteristics

There is a direct relationship between a passive portfolio's tracking error relative to its index and the time and expense necessary to create and maintain the portfolio.

Which of the following statements regarding momentum strategies is true?

Exchange-Traded Funds (ETF) are depository receipts that give investors a pro rata claim on the capital gains and cash flows of securities held by financial institutions.

If the annual geometric mean for the equity risk premium is 8.4%, what percentage of the equity risk premium is consumed by trading costs of 1.2%?

Exchange traded funds

____ is a strategy used because the market seems to reward companies that have steady, above average earnings growth, or whose prices are rising because of market optimism.

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

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