Portfolio Construction Management And Protection 5th Edition by R. A. Strong – Test Bank

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Chapter Five

 

The Mathematics of Diversification

 

 

A         1.  The work of Harry Markowitz is based on the search for

  1. efficient portfolios
  2. undervalued securities
  3. the highest long-term growth rates
  4. minimum risk portfolios

 

B         2.  Securities A and B have expected returns of 12% and 15%, respectively.  If you put 30% of your money in Security A and the remainder in B, what is the portfolio expected return?

  1. 4%
  2. 1%
  3. 6%
  4. 3%

 

B         3.  Securities A and B have expected returns of 12% and 15%, respectively.  If you put 40% of your money in Security A and the remainder in B, what is the portfolio expected return?

  1. 4%
  2. 8%
  3. 6%
  4. 3%

 

B         4.  The variance of a two-security portfolio decreases as the return correlation of the two securities

  1. increases
  2. decreases
  3. changes in either direction
  4. cannot be determined

 

D         5.  A security has a return variance of 25%.  The standard deviation of returns is

  1. 5%
  2. 15%
  3. 25%
  4. 50%

 

 

 

 

C         6.  A security has a return variance of 16%.  The standard deviation of returns is

  1. 4%
  2. 16%
  3. 40%
  4. 50%

 

A         7.  Covariance is the product of two securities’

  1. expected deviations from their means
  2. standard deviations
  3. betas
  4. standard deviations divided by their correlation

 

C         8.  The covariance of a random variable with itself is

  1. its correlation with itself
  2. its standard deviation
  3. its variance
  4. equal to 1.0

 

D         9.  Covariance is _____ correlation is ______.

  1. positive, positive or negative
  2. negative, positive or negative
  3. positive or negative, positive or zero
  4. positive or negative, positive or negative

 

C         10.  For a six-security portfolio, it is necessary to calculate ___ covariances plus ___ variances.

  1. 36, 6
  2. 30, 6
  3. 15, 6
  4. 30, 12

 

B         11.  COV (A,B) = .335.  What is COV (B,A)?

  1. – 0.335
  2. 335
  3. (0.335 x 0.335)
  4. Cannot be determined

 

A         12.  One of the first proponents of the single index model was

  1. William Sharpe
  2. Robert Merton
  3. Eugene Fama
  4. Merton Miller

 

B         13.  Without knowing beta, determining portfolio variance with a sixty-security portfolio requires ___ statistics per security.

  1. 1
  2. 60
  3. 3600/2
  4. 3600

 

B         14.  Securities A, B, and C have betas of 1.2, 1.3, and 1.7, respectively.  What is the beta of an equally weighted portfolio of all three?

  1. 15
  2. 40
  3. 55
  4. 60

 

B         15.  Securities A, B, and C have betas of 1.2, 1.3, and 1.7, respectively.  What is the beta of a portfolio composed of 1/2 A and 1/4 each of B and C?

  1. 15
  2. 35
  3. 55
  4. 60

 

B         16.  A diversified portfolio has a beta of 1.2; the market variance is 0.25.  What is the diversified portfolio’s variance?

  1. 33
  2. 36
  3. 41
  4. 44

 

B         17.  Security A has a beta of 1.2; security B has a beta of 0.8.  If the market variance is 0.30, what is COV (A,B)?

  1. .255
  2. .288
  3. .314
  4. .355

 

B         18.  As portfolio size increases, the variance of the error term generally

  1. increases
  2. decreases
  3. approaches 1.0
  4. becomes erratic

 

 

 

C         19.  The least risk portfolio is called the

  1. optimum portfolio
  2. efficient portfolio
  3. minimum variance portfolio
  4. market portfolio

 

B         20.  Industry effects are associated with

  1. the single index model
  2. the multi-index model
  3. the Markowitz model
  4. the covariance matrix

 

A         21.  COV (A,B) is equal to

  1. the product of their standard deviations and their correlation
  2. the product of their variances and their correlation
  3. the product of their standard deviations and their covariances
  4. the product of their variances and their covariances

 

A         22.  The covariance between a constant and a random variable is

  1. zero
  2. 0
  3. their correlation
  4. the product of their betas

 

D         23.  The covariance between a security’s returns and those of the market index is 0.03.  If the security beta is 1.15, what is the market variance?

  1. 005
  2. 010
  3. 021
  4. 026

 

D         24.  COV(A,B) = 0.50; the variance of the market is 0.25, and the beta of Security A is 1.00.  What is the beta of security B?

  1. 00
  2. 25
  3. 50
  4. 00

 

 

 

 

 

D         25.  There are 1,700 stocks in the Value Line index.  How many covariances would have to be calculated in order to use the Markowitz full covariance model?

  1. 1,700
  2. 5,650
  3. 12,350
  4. 1,444,150

 

A         26.  There are 1,700 stocks in the Value Line index.  How many betas would have to be calculated in order to find the portfolio variance?

  1. 1,700
  2. 5,650
  3. 12,350
  4. 1,444,150

 

A         27.  Knowing beta, determining the portfolio with a sixty-security fully diversified portfolio requires ______ statistic(s) per security.

  1. 1
  2. 60
  3. 3600/2
  4. 3600

 

A         28.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the expected return for a portfolio with 80% invested in Stock A and 20% invested in Stock B?

  1. 17%
  2. 19%
  3. 21%
  4. 23%

 

B         29.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the standard deviation for a portfolio with 80% invested in Stock A and 20% invested in Stock B?

  1. 15.8%
  2. 18.4%
  3. 22.0%
  4. 28.0%

 

 

A         30.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the beta for a portfolio with 80% invested in Stock A and 20% invested in Stock B?

  1. 57
  2. 77
  3. 97
  4. 17

 

A         31.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the covariance between Stock A and Stock B?

  1. 0.015
  2. 0.025
  3. 0.035
  4. 0.045

 

C         32.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the percent invested in Stock A to yield the minimum standard deviation portfolio containing Stock A and Stock B?

  1. 25%
  2. 50%
  3. 75%
  4. 90%

 

C         33.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the expected return for a portfolio with 50% invested in Stock A and 50% invested in Stock B?

  1. 18%
  2. 19%
  3. 20%
  4. 21%

 

 

 

 

B         34.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the standard deviation for a portfolio with 50% invested in Stock A and 50% invested in Stock B?

  1. 15%
  2. 20%
  3. 23%
  4. 25%

 

C         35.  Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25.  What is the beta for a portfolio with 50% invested in Stock A and 50% invested in Stock B?

  1. 0.425
  2. 0.625
  3. 0.825
  4. 1.125

 

B         36.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the expected return for a portfolio with 70% invested in Stock M and 30% invested in Stock N?

  1. 11%
  2. 13%
  3. 15%
  4. 17%

 

C         37.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the standard deviation for a portfolio with 70% invested in Stock M and 30% invested in Stock N?

  1. 5%
  2. 6%
  3. 7%
  4. 0%

 

 

 

B         38.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the covariance between Stock M and Stock N?

  1. 01052
  2. 01875
  3. 03425
  4. 04775

 

D         39.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the percent invested in Stock M to yield the minimum standard deviation portfolio containing Stock M and Stock N?

  1. 34%
  2. 55%
  3. 73%
  4. 92%

 

A         40.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the expected return for a portfolio with 80% invested in Stock M and 20% invested in Stock N?

  1. 12%
  2. 14%
  3. 16%
  4. 18%

 

B         41.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the standard deviation for a portfolio with 80% invested in Stock M and 20% invested in Stock N?

  1. 2%
  2. 1%
  3. 3%
  4. 5%

 

 

 

 

A         42.  Suppose Stock M has an expected return of 10%, a standard deviation of 15%, and a Beta of 0.6 while Stock N has an expected return of 20%, a standard deviation of 25% and a beta of 1.04, and the correlation between the two stocks is 0.50.  What is the beta for a portfolio with 80% invested in Stock M and 20% invested in Stock N?

  1. 0.688
  2. 0.738
  3. 0.878
  4. 0.968

 

The next 8 questions relate to the following table of information:

 

Stock X            Stock Y

 

Expected Return                    14%                  18%

Standard Deviation                40%                  54%

Beta                                          1.20                  1.50

Correlation (X,Y)  =  0.25

 

C         43.  What is the expected return for a portfolio with 60% invested in X and 40% invested in Y?

  1. 4%
  2. 9%
  3. 6%
  4. 1%

 

B         44.  What is the standard deviation for a portfolio with 60% invested in X and 40% invested in Y?

  1. 4%
  2. 1%
  3. 2%
  4. 6%

 

C         45.  What is the beta for a portfolio with 60% invested in X and 40% invested in Y?

  1. 12
  2. 22
  3. 32
  4. 42

 

 

 

 

D         46.  What is the covariance between Stock X and Stock Y?

  1. 025
  2. 033
  3. 047
  4. 054

 

D         47.  What is the percent invested in Stock X to yield the minimum variance portfolio with Stock X and Stock Y?

  1. 21
  2. 38
  3. 51
  4. 69

 

D         48.  What is the expected return for a portfolio with 20% invested in X and 80% invested in Y?

  1. 9%
  2. 6%
  3. 5%
  4. 2%

 

B         49.  What is the standard deviation for a portfolio with 20% invested in X and 80% invested in Y?

  1. 2%
  2. 8%
  3. 1%
  4. 6%

 

D         50.  What is the beta for a portfolio with 20% invested in X and 80% invested in Y?

  1. 14
  2. 24
  3. 34
  4. 44

 

 

 

 

Chapter Seventeen

 

Principles of Options and Option Pricing

 

 

B         1.  A famous option-pricing model was developed by

  1. Fisher and Lorie
  2. Black and Scholes
  3. Ingersoll and Rand
  4. Sharpe and Lintner

 

A         2.  A primary use of options in portfolio management is

  1. risk management
  2. meeting statutory requirements
  3. satisfying legal lists
  4. estate taxes

 

B         3.  The most common use of options by individuals is

  1. tax avoidance
  2. income generation
  3. arbitrage
  4. diversification

 

C         4.  Which of the following gives its owner the right to buy?

  1. Straddle
  2. Put option
  3. Call option
  4. Spread

 

C         5.  The price of an option is called its

  1. time value
  2. intrinsic value
  3. premium
  4. expiration value

 

D         6.  For most options, an individual investor views expiration day as the _____ of the month.

  1. first business day
  2. second Tuesday
  3. second Tuesday after the first Monday
  4. third Friday

 

 

A         7.  Writing an option is

  1. selling an option as an opening transaction
  2. selling an option as a closing transaction
  3. buying an option as an opening transaction
  4. buying an option as a closing transaction

 

B         8.  Who keeps the option premium no matter what?

  1. The Options Clearing Corporation
  2. The option writer
  3. The option buyer
  4. The option writer and the option buyer split it

 

D         9.  A stock priced at $55 per share will most likely have option striking prices _____ apart.

  1. $1
  2. $2
  3. $4
  4. $5

 

B         10.  The Options Clearing Corporation is most concerned with

  1. market risk
  2. credit risk
  3. interest rate risk
  4. political risk

 

A         11.  On which of the following exchanges are the fewest options traded?

  1. New York Stock Exchange
  2. Philadelphia Stock Exchange
  3. Chicago Board Options Exchange
  4. American Stock Exchange

 

B         12.  The book used an example of call options and

  1. libraries
  2. hockey tickets
  3. automobile transmissions
  4. telephones

 

B         13.  Which of the following is correct?

  1. Intrinsic value – time value = option premium
  2. Intrinsic value + time value = option premium
  3. Intrinsic value = time value – option premium
  4. Intrinsic value = time value + option premium

 

D         14.  An option which can be exercised anytime is a(n)

  1. European option
  2. wildcard option
  3. Asian option
  4. American option

 

C         15.  An option contract usually covers ____ shares.

  1. 10
  2. 50
  3. 100
  4. 1000

 

B         16.  Option exercise is at the prerogative of the

  1. option writer
  2. option buyer
  3. either the option writer or the option buyer
  4. Options Clearing Corporation

 

C         17.  An increase in which of the following will cause a call option to decline in value?

  1. Volatility
  2. Underlying asset price
  3. Striking price
  4. Interest rates

 

B         18.  A person holds 2 XYZ APR 60 calls.  What is their holding after a 2 for 1 stock split?

  1. 2 XYZ APR 60 calls
  2. 4 XYZ APR 30 calls
  3. 2 XYZ APR 30 calls
  4. 4 XYZ APR 60 calls

 

D         19.  All of the following are assumptions of the Black-Scholes option pricing model except

  1. markets are efficient
  2. no dividends
  3. interest rates are constant
  4. investors are generally bullish

 

 

 

 

 

B         20.  Delta is the

  1. theoretical value of an option
  2. expected change in the option value as the underlying asset price changes
  3. intrinsic value of the option
  4. influence of dividends on the option value

 

C         21.  For at-the-money stock options, put/call parity requires that, for otherwise similar options

  1. puts sell for more than calls
  2. puts sell for the same price as calls
  3. puts sell for less than calls
  4. puts sell for at least as much as calls

 

A         22.  The delta of a call option can be calculated as part of the Black-Scholes model since it is equal to

  1. N(d1)
  2. N(d2)
  3. Ke-rt
  4. d2

 

B         23.  According to option pricing theory, a higher dividend payout would cause the call option premium to

  1. increase
  2. decrease
  3. remain the same
  4. any of the above can occur

 

A         24.  According to option pricing theory, a higher dividend payout would cause the put option premium to

  1. increase
  2. decrease
  3. remain the same
  4. any of the above can occur

 

A         25.  According to option pricing theory, a higher volatility would cause the call option premium to

  1. increase
  2. decrease
  3. remain the same
  4. any of the above can occur

 

A         26.  According to option pricing theory, a higher volatility would cause the put option premium to

  1. increase
  2. decrease
  3. remain the same
  4. any of the above can occur

 

C         27.  If the stock price is 54, the exercise price is 50, and the call premium is 7, what is the intrinsic value?

  1. 0
  2. 3
  3. 4
  4. 7

 

B         28.  If the stock price is 54, the exercise price is 50, and the call premium is 7, what is the time value?

  1. 0
  2. 3
  3. 4
  4. 7

 

A         29.  If the stock price is 54, the exercise price is 50, and the put premium is 1, what is the intrinsic value?

  1. 0
  2. 1
  3. 3
  4. 4

 

B         30.  If the stock price is 54, the exercise price is 50, and the put premium is 1, what is the time value?

  1. 0
  2. 1
  3. 3
  4. 4

 

B         31.  If the stock price is 27, the strike price is 30, and the call premium is 2, the intrinsic value is

  1. –2
  2. 0
  3. 2
  4. 3

 

C         32.  If the stock price is 27, the strike price is 30, and the call premium is 2, the time value is

  1. –2
  2. 0
  3. 2
  4. 3

 

C         33.  If the stock price is 27, the strike price is 30, and the put premium is 5, the intrinsic value is

  1. –3
  2. 0
  3. 3
  4. 4

 

C         34.  If the stock price is 27, the strike price is 30, and the put premium is 5, the time value is

  1. –2
  2. 0
  3. 2
  4. 3

 

B         35.  The delta for a call option will always satisfy which of the following conditions?

  1. –1 < deltac < 0
  2. 0 < deltac < 1
  3. –1 < deltac < 1
  4. deltac > 0

 

A         36.  The delta for a put option will always satisfy which of the following conditions?

  1. –1 < deltap < 0
  2. 0 < deltap < 1
  3. –1 < deltap < 1
  4. deltap < 0

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