Question 1

The Treynor-Black model does not assume that

Accepted Answer

A)   the objective of security analysis is to form an active portfolio of a limited number of mispriced securities.
B)   the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock.
C)   the optimal weight of a mispriced security in the active portfolio is a function of the degree of mispricing,the market sensitivity of the security,and its degree of nonsystematic risk.
D)   indexing is always optimal.
E)   the objective of security analysis is to form an active portfolio of a limited number of mispriced securities;the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock;and the optimal weight of a mispriced security in the active portfolio is a function of the degree of mispricing,the market sensitivity of the security,and its degree of nonsystematic risk. D

Question 2

Describe how one might hedge against systematic risk.

Accepted Answer

If one owns a stock portfolio and is worried about a possible market decline,one might sell stock option futures.If the value of the portfolio decline,the futures contracts provide offsetting profits.

Question 3

Variable life insurance

Accepted Answer

A)   combines life insurance with a tax-deferred annuity.
B)   provides a minimum death benefit that increases subject to investment performance.
C)   can be converted to a stream of income.
D)   all of these.
E)   none of these D

Question 4

One property of a risky portfolio that combines an active portfolio of mispriced securities with a market portfolio is that,when optimized,its squared Sharpe measure increases by the square of the active portfolio's

Accepted Answer

A)   Sharpe ratio.
B)   appraisal ratio.
C)   alpha.
D)   Treynor measure.
E)   none of these.

Question 5

The contribution of selection within markets to Wiseguys total excess return was

Accepted Answer

A)   1%
B)   3%
C)   4%
D)   5%
E)   none of these

Question 6

Cross-hedging

Accepted Answer

A)   accounts for most hedging activity.
B)   uses a hedge vehicle that is based on a different asset than the one to be hedged.
C)   can eliminate a large fraction of the total risk of an unprotected portfolio.
D)   both b and c.
E)   all of these.

Question 7

Consider the Treynor-Black model.The alpha of an active portfolio is 3%.The expected return on the market index is 18%.The standard deviation of the return on the market portfolio is 25%.The nonsystematic standard deviation of the active portfolio is 15%.The risk-free rate of return is 6%.The beta of the active portfolio is 1.2.The optimal proportion to invest in the active portfolio is _________.

Accepted Answer

A)   50.0%
B)   69.4%
C)   72.3%
D)   80.6%
E)   100.0%

Question 8

In the Treynor-Black model,the weight of each security in the portfolio should be proportional to its _________.

Accepted Answer

A)   alpha/beta
B)   alpha/beta/residual variance
C)   beta/residual variance
D)   alpha/residual variance
E)   none of these

Question 9

Suppose that a corporation needs to raise capital by issuing commercial paper with a maturity of 90 days three months from now.What would the firm most likely do as a protection against an unanticipated increase in short-term rates?

Accepted Answer

A)   Buy futures contracts written on T-bills.
B)   Sell futures contracts written on T-bills.
C)   Buy futures contracts written on corporate bonds.
D)   Sell futures contracts written on T-bonds.
E)   None of these.

Question 10

According to the Treynor-Black model,the weight of a security in the active portfolio depends on the ratio of __________ to _________.

Accepted Answer

A)   the degree of mispricing;the nonsystematic risk of the security
B)   the degree of mispricing;the systematic risk of the security
C)   the market sensitivity of the security;the nonsystematic risk of the security
D)   the nonsystematic risk of the security;the systematic risk of the security
E)   the total return on the security;the nonsystematic risk of the security

Question 11

The longest time horizons are likely to be set by

Accepted Answer

A)   banks.
B)   property and casualty insurance companies.
C)   pension funds
D)   a and c
E)   b and c

Question 12

The total excess return on the Wiseguys managed portfolio was _________.

Accepted Answer

A)   1%
B)   3%
C)   4%
D)   5%
E)   none of these

Question 13

Discuss the Treynor-Black model.

Accepted Answer

The answer of Discuss the Treynor-Black model....

Question 14

You have a record of an analyst's past forecasts of alpha.Describe how you would use this information within the context of the Treynor-Black model to determine the forecasting ability of the analyst.

Accepted Answer

The answer of You have a record of an analyst's...

Question 15

Hedging against future interest rate changes

Accepted Answer

A)   is very simple as futures contracts on many different fixed income investments are available.
B)   provides for less risk than an unhedged position,even if cross-hedging is used.
C)   is complex as yield spreads fluctuate over time.
D)   a and b.
E)   b and c.

Question 16

The Treynor-Black model assumes that

Accepted Answer

A)   the objective of security analysis is to form an active portfolio of a limited number of mispriced securities.
B)   the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock.
C)   the optimal weight of a mispriced security in the active portfolio is a function of the degree of mispricing,the market sensitivity of the security,and its degree of nonsystematic risk.
D)   all of these are true.
E)   none of these are true.

Question 17

The investment horizon is:

Accepted Answer

A)   the investor's expected age at death.
B)   the starting date for establishing investment constraints.
C)   based on the investor's risk tolerance.
D)   the date at which the portfolio is expected to be fully or partially liquidated.
E)   none of these.

Question 18

Stock index futures contracts are tools used by equity investors to reduce:

Accepted Answer

A)   Interest rate risk.
B)   Systematic risk.
C)   Exchange rate risk.
D)   All of these.
E)   None of these.

Question 19

The critical variable in the determination of the success of the active portfolio is

Accepted Answer

A)   alpha/systematic risk
B)   alpha/nonsystematic risk
C)   gamma/systematic risk
D)   gamma/nonsystematic risk
E)   none of these

Question 20

The Treynor-Black model

Accepted Answer

A)   considers both macroeconomic and microeconomic risks.
B)   considers security selection only.
C)   is relatively easy to implement.
D)   a and c.
E)   b and c.

Exam 21: Investors and the Investment Process