1 1 CFA l1 portfolio management questions pdf

If the expected return on T-bills is 3% and the standard deviation of the market is 9%, then the covariance between the market portfolio and the fund is closest to: A... The returns of

CFA LEVEL 1 –

PORTFOLIO MANAGEMENT

By AnalystPrep.com

1 BCG Bank has a one month Value at Risk (VaR) of $400 million with the probability of 5%, which means:

A One month maximum loss of $400 million will occur 5% of the time

B Loss of $20 million will occur one month from now

C One month minimum loss of $400 million will occur 5% of the time

2 Overperiods in which returns display volatility, the arithmetic mean return value will be:

A Higher than the geometric mean return values

B Lower than the geometric mean return values

C The same as the geometric mean return values

3 The line that represents the combination of the optimal risky portfolio and the risk-free assets

is known as the:

A Capital allocation line

B Indifference curve

C Efficient frontier

4 Ben Carter, CFA, is an equity analyst and is assigned to discount the net present value (NPV)

of Indo Inc which has 40% of debt in its capital structure What discount rate should Carter use

if the after-tax cost of debt is 7%, the risk premium is 11%, the risk-free rate is 2%, and the Beta

of Indo is 0.8?

A 9.40%

B 9.28%

C 10.80%

5 Which of the following return-generating models uses macroeconomic indicators such as GDP growth and inflation along with fundamental factors such as earnings and earnings growth to forecast future value?

A Revenue model

B Market model

C Multifactor model

6 Data collected from such devices as smart phones, cameras, RFID chips, is referred as:

A Generated by individuals

B Generated by business processes

C Generated by sensors

7 Which of the following is/are the most likely similarity(ies) between exchange-traded funds

and closed-end funds?

I Both types of funds are passively managed to match a particular index

II In both types of funds, the market price of shares and the net asset value (NAV) can differ

significantly

III Both types of funds can be sold and purchased on the open market

A III only

B I & III only

C I & II only

8 A portfolio had the following annual rates of return:

The portfolio’s manager states that the return for the period is 5% The manager is referring to the:

A Holding period return

B Arithmetic mean return

C Geometric mean return

9 The difference between the gross return and the net return of a portfolio most likely results

from:

A Accounting methods

B Fees

C Taxes and regulations

10 An analyst gathered this information about two stocks:

Variance of returns Correlation coefficient

What is the covariance between A and B?

A 0.043

B 0.00012

C 0.0069

11 Four portfolios have the following expected returns and risk:

A risk-averse agent choosing from these portfolios would most likely select:

A Portfolio A

B Portfolio C

C Portfolio D

12 An analyst gathered this information about two stocks:

What is the covariance between A and B?

A 45.91

B 42.21

C 43.21

13 Which of the following is least likely a characteristic of open-ended mutual funds?

A Open-end funds accept new investment money and issue additional shares to existing or new investors Therefore, the number of outstanding shares changes after every new investment

B In open-end funds, new shares are created and sold at a premium or a discount to net assets values depending on the demand for the shares

C An open-end structure makes it easy to grow in size but creates pressure on the portfolio manager to manage the cash inflows and outflows

14 Which of the following is the first-order risk measure of the change in the option price for a change in the volatility of the underlying asset?

A Gamma

B Rho

C Vega

15 As mandated by regulators worldwide, the global investment industry has undertaken major steps in stress testing and risk assessment that involve the analysis of vast amounts of

quantitative and qualitative risk data Which of the following statements is most accurate?

A There is decreasing interest in monitoring risk in real time because of the advances in artificial intelligence (AI)

B Required data include information on the liquidity of the firm, its balance sheet

positions and credit exposures

C Big Data cannot help identify weakening market conditions and adverse trends in

advance

16 Stock A’s expected return is 5%, and its standard deviation is 12% Stock B’s expected return

is 12%, and its standard deviation is 17% What is the standard deviation of a portfolio composed of 40% stock A and 60% stock B given that the correlation between the two stocks is 0.5?

A 13.27%

B 1.76%

C 19.90%

17 Given the CAPM model, Company A is expected to return 10% to its investors The expected return of the market is 8%, and the risk-free rate is 3% Company A’s beta is closest to:

A 0.88

B 1.40

C 0.71

18 Which of these investors is more likely to have a low tolerance for investment risks?

A Calton University

B Newtown Car Insurance Inc

C UNN Defined Benefit Pension Plan

19 Portfolio ABC has a beta of 1.6 and generated a return of 21% If the risk-free rate is 2% and the market premium is 10%, Jensen’s alpha for this portfolio is closest to:

A 5.0%

B 6.2%

C 3.0%

20 An analyst has recently read a research paper developed at a renowned university which says that the prices of derivatives are also sensitive to the changes in interest rates If the analyst

is interested in measuring such changes, then the best metric he should use is:

A Rho

B Gamma

C Delta

21 An investor is interested in knowing the real return his portfolio has earned over a certain period Assuming that the nominal return of his portfolio is 18%, the CPI is 6%, and the tax rate

is 38.9%, then the real return of the portfolio is closest to:

A 19.08%

B 11.32%

C 6.92%

22 Two stocks in different industries will create a perfectly diversified portfolio if the correlation coefficient is:

A -1

B 0

C 1

23 Which of the following is not considered a constraint when preparing an investment policy

statement?

A Legal and regulatory factors

B Liquidity needs

C Risk tolerance

24 Which of the following pooled investment share prices is most likely to be significantly

different from its net asset value (NAV) per share?

A Share price from an open-end fund

B Share price from a closed-end fund

C Share price from an exchange-traded fund

25 An open-ended fund that invests in short-term debt securities such as U.S Treasury bills

and commercial paper is most likely a:

A Fixed income fund

B Money market fund

C Fund-of-funds

26 According to CAPM, risk-neutral investors are more likely to invest in:

A The least risky portfolio on the efficient frontier of risky securities

B The riskiest portfolio on the efficient frontier of risky securities

C The market portfolio leveraged by the risk-free asset

27 The beta of a fund is 1.4 If the expected return on T-bills is 3% and the standard deviation of

the market is 9%, then the covariance between the market portfolio and the fund is closest to:

A 0.0063

B 0.0113

C 0.1260

28 A junior fund manager at Dapper Assets Management is constructing a portfolio consisting

of a few large-cap stocks that trade on the London Stock Exchange In a meeting with the investment committee, the manager was asked to present the risk associated with the stock of ATT The returns of the stock for the past 7 years are shown in the following table:

Using the given data, the standard deviation of the stock is closest to:

A 11.53%

B 1.33%

C 7.56%

29 Which section of the investment policy statement provides description regarding the custodian of the client’s assets?

A Introduction

B Investment guidelines

C Statement of duties and responsibilities

30 Recourse Associates is an investment management firm located in the United States Bailey Gibbons is a portfolio manager serving the firm Gibbons is managing the Global Developing Market Equity Fund (GDMEF) at Recourse The assets under management and the net returns generated by the fund over the previous three years are summarized in an exhibit The applicable tax rate is 30%, and inflation is expected to remain stable at a rate of 1.5% Net returns are prior to considering the effects of taxes and inflation

Year Assets Under Management at the Beginning

of the Year ($)

Net Return (%)

The real after-tax return of the fund in Year 2 is closest to:

A.1.97%

B.2.41%

C.3.50%

31 Mark Taylor is an equity investor who has recently purchased the stock of a Kenyan enterprise The risk-free rate of return in Kenya is 4.5%, while the expected return on the market index is 7.2% The correlation of the stocks purchased with the market index has recently increased from 0.6 to 0.8, and the standard deviation of the stock and market index is 25.7% and

16.4% respectively The expected return on the Kenyan stock is closest to:

A 5.88%

B 7.88%

C 13.53%

32 Maya Thomas is an independent equity investor who has undertaken an investment in a Brazilian coffee manufacturer’s stock The covariance of the manufacturer’s stock with the market index is 0.01577, and the market variance is 0.01360

Thomas can most likely anticipate earning a return on her equity investment that is:

A less than the risk-free rate

B less than the market return

C greater than the market return

33 Which of the following sections of an Investment Policy Statement (IPS) provides relevant information on specific types of assets that have been excluded from the portfolio?

A Investment objectives

B Investment constraints

C Investment guidelines

34 Which of the following least likely depicts the investor's ability to take risk?

A Seventy percent of the investor’s home mortgage has already been paid

B The investor has net assets of $470,000 and an investment horizon of 14 years

C The investor is a Ph.D in Economics and understands the risk associated with the stock markets

35 Distributed ledger technology (DLT) has the potential to accommodate “smart contracts.”

Those smart contracts are most likely:

A Computer programs that self-execute on the basis of pre-specified terms and conditions agreed to by the parties to a contract

B A digital currency created in January 2009 by the mysterious Satoshi Nakamoto

C Computer programs that follow trends and patterns of money invested by people with expert knowledge

36 Which of the following is not a true statement about VaR?

A A VaR measure does not tell the maximum loss

B A VaR measure focuses on the right tail of the distribution

C VaR is subject to the same model risk as the derivative pricing model

37 The feedback step least likely assists in rebalancing the client’s portfolio due to change in:

A Asset weightings

B Security prices

C Circumstances of the investment manager

38 Which of the following is most likely to be an objective for a foundation?

A Maintain the fund’s nominal value

B Reduce the volatility of spending needs

C Generate liquidity to meet spending needs

39 Sasha Gable is managing the portfolio of a pension fund, which is equally invested in equities and real estate The correlation between the two securities is 0.10 Details concerning expected annual returns and standard deviations are summarized in the exhibit below:

Expected Annual Return (%)

Expected Annual Standard Deviation (%)

Holding all else constant, if Gable decides to increase the weight of equities to 60% by selling real estate, the portfolio standard deviation will, in percentage terms:

A Increase by 3.38%

B Decrease by 12.18%

C Decrease by 14.44%

40 Stock returns are usually negatively skewed This statement implies that:

A The standard deviation will be overestimated

B There is a higher than normal possibility for extreme returns

C There is a high frequency of positive deviations from the mean

41 At the beginning of the year 2010, an investor deposited $25,000 in his investment account

He generated an investment gain of $4,000 during the same year, which resulted in an ending account balance of $29,000 In 2011, the investor withdrew $12,000 from his account at year end

At the beginning of the year 2012, the investor deposited a further $5,000 In 2013, no further transactions were made, and the value of the investment account at the end of the year was

$20,000 The IRR of the investment account is closest to:

A 3.44%

B 11.88%

C 20.11%

42 The table below illustrates expected annual risk and beta data concerning three textile manufacturers (A, B and C)

Textile Manufacturer

Expected Annual

Out of the three manufacturers, the highest total risk is equal to:

A 0.065

B 0.101

C 0.318

43 An investor currently owns a portfolio with an expected annual return and standard deviation of 12% and 18% respectively The investor is considering adding a new stock in his current portfolio The standard deviation of the stock is 22%, and its correlation with the current portfolio is 0.35

Considering 5% a risk-free rate, the risk-adjusted return of the stock from adding to the investor’s current portfolio is closest to:

A 7.99%

B 12.15%

C 25.67%

44 A portfolio consists of 30 assets with the correlation being 0.75 among all pairs of assets The

portfolio variance is 0.0625 The risk of such a portfolio will be closest to:

A 4.84%

B 15.63%

C 22.62%

45 A portfolio manager forms an investment portfolio with two asset classes, 1 and 2, held in the proportions 60% and 40% respectively The expected annual returns and standard deviations of the asset classes are summarized in the table below

If the portfolio standard deviation is 14.5%, the correlation between the two asset classes should

be closest to:

A 0.20

B 0.73

C 1.00

Asset Class

Expected Annual Return (%)

Expected Annual Standard Deviation (%)

46 One difference between a defined contribution (DC) and defined benefit (DB) plan is that in the case of the latter:

A Future benefits are undefined

B Investment risk exposure is low

C Employees are required to contribute a portion of their wages each period

47 What are the implications for investors using the Markowitz efficient frontier for making investment decisions?

A The slope of the efficient frontier is concave

B Investors are rewarded with increasing increases in returns for assuming more risk

C Portfolios to the right of the global minimum variance portfolio are the most efficient

48 An investor has purchased shares of a large-cap equity stock The covariance of the stock with the market index is 0.0320, while the standard deviation of the stock and the market index

is 22.5% and 15.7% respectively The return of the large-cap equity stock most likely follows a

trend which:

A Follows the general market

B Resembles the general market

C Moves opposite to the general market

49 The advance in technology made the financial record keeping more efficient New

technology, such as distributed ledger technology (DTL):

A Provides secure ways to track ownership of financial assets on a peer-to-peer (P2P) basis

B Increases the need for financial intermediaries

C All of the above