Investment Risk and Portfolio Management MCQs

The type of risk that is not diversifiable and affects the value of a portfolio is

Purchasing-power risk.
Market risk.
Non market risk.
Interest-rate risk.

When purchasing temporary investments, which one of the following best describes the risk associated with the ability to sell the investment in a shor...

Interest-rate risk.
Purchasing-power risk.
Financial risk.
Liquidity risk.

The risk that securities cannot be sold at a reasonable price on short notice is called

Default risk.
Interest-rate risk.
Purchasing-power risk.
Liquidity risk.

Political risk may be reduced by

Entering into a joint venture with another foreign company.
Making foreign operations dependent on the domestic parent for technology, markets, and supplies.
Refusing to pay higher wages and higher taxes.
Financing with capital from a foreign country.

The risk of loss because of fluctuations in the relative value of foreign currencies is called

Expropriation risk.
Multinational beta.
Exchange rate risk.
Undiversifiable risk.

Prior to the introduction of the euro, O & B Company, a U.S. corporation, was in possession of accounts receivable denominated in Deutsche marks. To w...

Liquidity risk.
Business risk.
Exchange-rate risk.
Price risk.

An investment security with high risk will have a(n)

Low expected return.
Lower price than an asset with low risk.
Increasing expected rate of return.
High standard deviation of returns.

Catherine & Co. has extra cash at the end of the year and is analyzing the best way to invest the funds. The company should invest in a project only i...

Expected return on the project exceeds the return on investments of comparable risk.
Return on investments of comparable risk exceeds the expected return on the project.
Expected return on the project is equal to the return on investments of comparable risk.
Return on investments of comparable risk equals the expected return on the project.

The marketable securities with the least amount of default risk are

Federal government agency securities.
U.S. Treasury securities.
Repurchase agreements.
Commercial paper.

The best example of a marketable security with minimal risk would be

Municipal bonds.
The common stock of a AAA-rated company.
The commercial paper of a AAA-rated company.
Stock options of a AAA-rated company.

Which of the following classes of securities are listed in order from lowest risk/opportunity for return to highest risk/opportunity for return?

U.S. Treasury bonds; corporate first mortgage bonds; corporate income bonds; preferred stock.
Corporate income bonds; corporate mortgage bonds; convertible preferred stock; subordinated debentures.
Common stock; corporate first mortgage bonds; corporate second mortgage bonds; corporate income bonds.
Preferred stock; common stock; corporate mortgage bonds; corporate debentures.

From the viewpoint of the investor, which of the following securities provides the least risk?

Mortgage bond.
Subordinated debenture.
Income bond.
Debentures.

An investor is currently holding income bonds, debentures, subordinated debentures, and first-mortgage bonds. Which of these securities traditionally ...

Income bonds.
Debentures.
Subordinated debentures.
First-mortgage bonds.

A feasible portfolio that offers the highest expected return for a given risk or the least risk for a given expected return is a(n)

Optimal portfolio.
Desirable portfolio.
Efficient portfolio.
Effective portfolio.

The risk of a single stock is

Interest rate risk.
Security risk.
Portfolio risk.
Market risk.

If two projects are completely and positively linearly dependent (or positively related), the measure of correlation between them is

0
+0.5
+1
-1

The returns on two stocks can be correlated in values except those that are

Positive.
Negative.
Neutral.
Skewed.

Which of the following specifically measures the volatility of returns together with their correlation with the returns of other securities?

Variance.
Standard deviation.
Coefficient of variation.
Covariance.

A market analyst has estimated the equity beta of Modern Homes, Inc., to be 1.4. This beta implies that the companys

Systematic risk is lower than that of the market portfolio.
Systematic risk is higher than that of the market portfolio.
Unsystematic risk is higher than that of the market portfolio.
Total risk is higher than that of the market portfolio.

A measure that describes the risk of an investment project relative to other investments in general is the

Coefficient of variation.
Beta coefficient.
Standard deviation.
Expected return.

The benefits of diversification decline to near zero when the number of securities held increases beyond

4
6
10
40

Based on the following information about stock price increases and decreases, make an estimate of the stock’s beta: July = Stock +1.5%, Market +1.1%...

Beta is greater than 1.0.
Beta is less than 1.0.
Beta equals 1.0.
There is no consistent pattern of returns.

DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ plans to use the following combination of debt and equity to ...

9.20%
7.20%
7.20%
12.00%

Using the capital asset pricing model (CAPM), the required rate of return for a firm with a beta of 1.25 when the market return is 14% and the risk-fr...

6%
7.5%
17.5%
16.0%

Which of the following is the major difference between the capital asset pricing model (CAPM) and arbitrage pricing theory (APT)?

CAPM uses discounted cash flows whereas APT does not.
CAPM uses a single systematic risk factor to explain an asset’s return whereas APT uses multiple systematic factors.
APT uses a single systematic risk factor to explain an asset’s return whereas CAPM uses multiple systematic factors.
Under CAPM, the beta coefficient of the risk-free rate of return is assumed to be higher than that of any asset in the portfolio. Under APT, the beta coefficient of every asset in the portfolio is individually compared to the beta of the risk-free rate.

Stock J has a beta of 1.2 and an expected return of 15.6%, and stock K has a beta of 0.8 and an expected return of 12.4%. What is the expected return ...

Market is 14%; risk-free is 6%.
Market is 12.4%; risk-free is 0%.
Market is 14%; risk-free is 4%.
Market is 14%; risk-free is 1.6%.

The difference between the required rate of return on a given risky investment and that on a riskless investment with the same expected utility is the...

Risk premium.
Coefficient of variation.
Standard deviation.
Beta coefficient.

The systematic risk of an individual security is measured by the

Standard deviation of the security’s rate of return.
Covariance between the security’s returns and the general market.
Security’s contribution to the portfolio risk.
Standard deviation of the security’s returns and other similar securities.

Which one of the following would have the least impact on a firm’s beta value?

Debt-to-equity ratio.
Industry characteristics.
Operating leverage.
Payout ratio.

If Dexter Industries has a beta value of 1.0, then its

Return should equal the risk-free rate.
Price is relatively stable.
Expected return should approximate the overall market.
Volatility is low.

The risk to which all investment securities are subject is known as

Credit risk.
Diversifiable risk.
Unsystematic risk.
Systematic risk.

One type of risk to which investment securities are subject can be offset through portfolio diversification. This type of risk is referred to as

Market risk.
Undiversifiable risk.
Liquidity risk.
Company risk.

A company holds industrial development bonds issued by a county in another state. The county commission has announced that its financial condition has...

Liquidity risk.
Interest rate risk.
Credit risk.
Political risk.

Which one of the following lists properly ranks financial instruments in order from the highest risk/opportunity for return to the lowest risk/opportu...

Common stock, preferred stock, income bonds, debentures, mortgage bonds, U.S. Treasury bonds.
Preferred stock, common stock, income bonds, debentures, mortgage bonds, U.S. Treasury bonds.
Common stock, preferred stock, debentures, mortgage bonds, income bonds, U.S. Treasury bonds.
Common stock, preferred stock, income bonds, mortgage bonds, debentures, U.S. Treasury bonds.

In theory, which of the following coefficients of correlation would eliminate risk in an investment portfolio?

1.0
0.0
-1.0
No theoretical coefficient exists for the elimination of risk in a portfolio context.

Listed below are four numbers. Which of these numbers represents the coefficient of correlation of a stock portfolio with the least risk?

100.0
0.0
1.0
-1.0

The incremental benefits of portfolio diversification initially decrease as the number of different securities held increases. The benefits become ex...

10 to 20.
20 to 30.
30 to 40.
40 to 50.

OldTime, Inc., is a mature firm operating in a very stable market. Earnings growth has averaged about 3.2% for the last dozen years, just staying in l...

The beta will fall, and the required return will rise.
The beta will fall, and the required return will fall.
The beta will rise, and the required return will fall.
The beta will rise, and the required return will rise.

If the return on the market portfolio is 10% and the risk-free rate is 5%, what is the effect on a company’s required rate of return on its stock of...

3% increase.
1.5% increase.
No change.
1.5% decrease.

The common stock of Wisconsinâ€™s Finest Cheese has a beta coefficient of . . The following information about overall market conditions is availa...

10.3%
4.3
2.5%
1.7%

An analyst at ABC Securities is in the process of reviewing the following information on YoYo, Inc., a publicly traded toy manufacturer:  Share pr...

Semi-strong form of the efficient market theory.
Strong form of the efficient market theory.
Semi-weak form of the capital asset pricing theory.
Weak form of the capital asset pricing theory.

The term “beta” can best be described as the

Variability or standard deviation of the investment returns.
Investment return’s sensitivity to changes in the market’s returns.
Investment return’s sensitivity to changes in interest rates.
Weighted-average return of an investment portfolio.

The CFO of Clean Waterworks, a publicly traded company, is expecting to pay a dividend next year of $1.25 and projecting that the price of the company...

$42.05
$45
$46.25
$51.39

Risk factors that cannot be eliminated through diversification include which of the following? I. Interest-rate fluctuations II. General price-level...

I and II only.
I, II, and III only.
II, III, and IV only.
I, II, III, and IV.

Yerxa Industries is considering expanding its international operations. Which one of the following conditions should Yerxa’s controller classify as ...

Expropriation of the plant after construction.
Declining home-country currency values.
Accelerating inflation of the host country.
Different accounting methods between home and host countries.

In the context of the capital asset pricing model (CAPM), the beta coefficient of a stock that has the same systematic risk as the market as a whole i...

0
-1
1
0.5

Systematic risk explains why

Stock values tend to move in the same direction.
Diversification reduces overall risk.
Stock values move in different directions.
Diversification increases overall risk.

Stock A and Stock B are combined into an equally weighted portfolio. If Stock A has a standard deviation of return of 30%, Stock B has a standard devi...

-0.05
0
-1.0
1.0

A stock began the year with a stock price of $60 per share. In the middle of the year, it had a 3-for-2 stock split. The stock ended the year with a p...

20%
15%
25%
30%

An analyst uses the capital asset pricing model (CAPM) to measure the required return on two stocks, X and Y. The expected market rate of return is 12...

6% for stock X and 24% for stock Y.
4% for stock X and 16% for stock Y.
8% for stock X and 32% for stock Y.
8% for stock X and 20% for stock Y.

An automobile company that uses the futures market to set the price of steel to protect a profit against price increases is an example of

A short hedge.
A long hedge.
Selling futures to protect the company from loss.
Selling futures to protect against price declines.

An optimal portfolio of investments is

Efficient because it offers the highest expected return.
Any portfolio chosen from the efficient set of portfolios.
Any portfolio chosen from the feasible set of portfolios.
Tangent to the investor’s highest indifference curve.

Redimaker, Inc., a small but growing product assembler, has been able to profitably ride the ups and downs of several economic cycles, largely due to ...

Margin.
Liquidity.
Solvency.
Leverage.

On April 1, year 1, Saxe, Inc. purchased $200,000 face value, 9% US Treasury Notes for $198,500, including accrued interest of $4,500. The notes mat...

$194,000
$196,800
$197,200
$199,000

Kale Co. purchased bonds at a discount on the open market as an investment and intends to hold these bonds to maturity. Kale does not elect the fair...

Cost.
Amortized cost.
Fair value.
Lower of cost or market.

For a marketable debt securities portfolio classified as heldto- maturity, which of the following amounts should be included in the period’s net i...

III only.
II only.
I and II.
I, II, and III.

Bing Corporation purchased bonds at a discount on the open market as an investment and intends to hold these bonds to maturity. Assume that Bing ele...

Cost.
Amortized cost.
Fair value.
Lower of cost or market.

For a marketable debt securities portfolio classified as heldto- maturity, which of the following amounts should be included in the period’s net i...

I only
I and II
I and III.
I, II, and IV.

Stone does not use the fair value option to account for available- for-sale securities. Information regarding Stone Co.’s portfolio of available-f...

$26,000
$22,000
$20,500
$0

Information regarding Shelton Co.’s portfolio of availablefor- sale securities is as follows: Aggregate cost as of 12/31/Y1 $150,000 Unrealized g...

$ 4,000 gain
$18,000 gain
$30,000 gain
$44,000 gain

Information regarding Shelton Co.’s portfolio of availablefor- sale securities is as follows: Aggregate cost as of 12/31/Y1 $150,000 Unrealized g...

$ 4,000 gain
$18,000 gain
$30,000 gain
$44,000 gain

On January 10, year 1, Box, Inc. purchased marketable equity securities of Knox, Inc. and Scot, Inc., neither of which Box could significantly influ...

An unrealized loss equal to I plus II.
An unrealized loss equal to I only.
A realized loss equal to I only.
No income statement effect.

On both December 31, year 1, and December 31, year 2, Kopp Co.’s only marketable equity security had the same fair value, which was below cost. Ko...

No effect on both net noncurrent assets and net income.
No effect on net noncurrent assets and decrease in net income.
Decrease in net noncurrent assets and no effect on net income.
Decrease in both net noncurrent assets and net income.

For the last ten years, Woody Co. has owned cumulative preferred stock issued by Hadley, Inc. During year 2, Hadley declared and paid both the year ...

As a reduction in cumulative preferred dividends receivable.
As a retroactive change of the prior period financial statements.
Include, net of income taxes, after year 2 income from continuing operations.
Include in year 2 income from continuing operations.

Deed Co. owns 2% of Beck Cosmetic Retailers. A property dividend by Beck consisted of merchandise with a fair value lower than the listed retail pri...

At fair value for both dividend revenue and employee compensation expense.
At listed retail price for both dividend revenue and employee compensation expense.
At fair value for dividend revenue and listed retail price for employee compensation expense.
By disclosure only.

Deed Co. owns 2% of Beck Cosmetic Retailers. A property dividend by Beck consisted of merchandise with a fair value lower than the listed retail pri...

As both an inflow and outflow for operating activities.
As both an inflow and outflow for investing activities.
As an inflow for investing activities and outflow for operating activities.
As a noncash activity.

Pal Corp.’s year 1 dividend revenue included only part of the dividends received from its Ima Corp. investment. Pal Corp. has an investment in Ima...

As an available-for-sale investment, and only a portion of Ima’s year 1 dividends represent earnings after Pal’s acquisition.
As an available-for-sale investment and its carrying amount exceeded the proportionate share of Ima’s fair value.
As an equity investment, and Ima incurred a loss in year 1.
As an equity investment, and its carrying amount exceeded the proportionate share of Ima’s fair value.

Deed Co. owns 2% of Beck Cosmetic Retailers. A property dividend by Beck consisted of merchandise with a fair value lower than the listed retail pri...

Sun Corp. had investments in marketable debt securities costing $650,000 that were classified as available-for-sale. On June 30, year 2, Sun decided...

$ 45,000
$ 85,000
$120,000
$0

Sun Corp. had investments in marketable debt securities costing $650,000 that were classified as available-for-sale. On June 30, year 2, Sun decided...

$ 40,000
$ 45,000
$160,000
$120,000

A marketable debt security is transferred from available-forsale to held-to-maturity securities. At the transfer date, the security’s carrying amo...

Fair value, regardless of whether the decline in fair value below cost is considered permanent or temporary.
Fair value, only if the decline in fair value below cost is considered permanent.
Cost, if the decline in fair value below cost is considered temporary.
Cost, regardless of whether the decline in fair value below cost is considered permanent or temporary.

Jill Corp. had investments in marketable debt securities purchased on January 1, year 1, for $650,000 that were classified as trading securities and...

$ 40,000
$ 85,000
$160,000
$0

Jill Corp. had investments in marketable debt securities purchased on January 1, year 1, for $650,000 that were classified as trading securities and...

$0
$ 40,000
$ 45,000
$120,000

Grant, Inc. acquired 30% of South Co.’s voting stock for $200,000 on January 2, year 1. Grant’s 30% interest in South gave Grant the ability to ...

$15,000
$24,000
$50,000
$80,000

Sage, Inc. bought 40% of Adams Corp.’s outstanding common stock on January 2, year 1, for $400,000. The carrying amount of Adams’ net assets at ...

$48,000
$42,000
$36,000
$32,000

On January 2, year 1, Kean Co. purchased a 30% interest in Pod Co. for $250,000. On this date, Pod’s stockholders’ equity was $500,000. The carr...

$210,000
$220,000
$270,000
$280,000

Park Co. uses the equity method to account for its January 1, year 1 purchase of Tun Inc.’s common stock. On January 1, year 1, the fair values of...

Decrease Decrease
Decrease No effect
Increase Increase
Increase No effect

An investor in common stock received dividends in excess of the investor’s share of investee’s earnings subsequent to the date of the investment...

No effect No effect
Decrease No effect
No effect Decrease
Decrease Decrease

Peel Co. received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it has classified the ...

No No
Yes Yes
Yes No
No Yes

On January 1, year 1, Point, Inc. purchased 10% of Iona Co.â€™s common stock. Point purchased additional shares bringing its ownership up to 40% ...

10% of Ionaâ€™s income for January 1 to July 31, year 1, plus 40% of Ionaâ€™s income for August 1 to December 31, year 1.
40% of Ionaâ€™s income for August 1 to December 31, year 1 only.
40% of Ionaâ€™s year 1 income.
Amount equal to dividends received from Iona.

In its financial statements, Pulham Corp. uses the equity method of accounting for its 30% ownership of Angles Corp. At December 31, year 1, Pulham ...

None of the receivable should be reported, but the entire receivable should be offset against Angles’ payable to Pulham.
70% of the receivable should be separately reported, with the balance offset against 30% of Angles’ payable to Pulham.
The total receivable should be disclosed separately.
The total receivable should be included as part of the investment in Angles, without separate disclosure.

An increase in the cash surrender value of a life insurance policy owned by a company would be recorded by

Decreasing annual insurance expense.
Increasing investment income.
Recording a memorandum entry only.
Decreasing a deferred charge.

Upon the death of an officer, Jung Co. received the proceeds of a life insurance policy held by Jung on the officer. The proceeds were not taxable. ...

Proceeds received.
Proceeds received less cash surrender value.
Proceeds received plus cash surrender value.
None.

Band Co. uses the equity method to account for its investment in Guard, Inc. common stock. How should Band record a 2% stock dividend received from ...

As dividend revenue at Guard’s carrying value of the stock.
As dividend revenue at the market value of the stock.
As a reduction in the total cost of Guard stock owned.
As a memorandum entry reducing the unit cost of all Guard stock owned.

On March 1, year 1, Acadia purchased 1,000 shares of common stock of Marston Corp. for $50,000 and classified the investment as available-for-sale s...

As a $3,000 gain in other comprehensive income.
No gain or loss is reported in year 1.
As a $3,000 prior period adjustment to retained earnings.
As a $3,000 gain in current earnings of the period.

Under IFRS any investment may be accounted for by fair value through profit and loss providing

It is traded in an active market.
It is an equity instrument.
It is a debt instrument.
The instrument matures within 2 years.

Under IFRS, investments are classified in any of the following different ways, except

Fair value through profit and loss.
Held to maturity.
Tradable.
Available for sale.

Under IFRS if a company uses the fair value method for accounting for an investment any changes in fair value are recognized in

Other comprehensive income.
Retained earnings.
Profit and loss.
Revaluation surplus.

Under IFRS an equity investment may be accounted for using the equity method if the investor has significant influence over the investee. Significan...

At least 10%.
From 20 to 50%.
More than 50%.
More than 70%.

Which of the following actions is MOST accurately associated with tactical asset allocation?

Investment decisions with a long term perspective
Investment decisions that do not emphasize current market conditions
Investment decisions with a primary goal of maximizing return
Investment decisions that do not depend on ability to diversity

Which of the following categories would NOT be considered a super asset class?

Capital assets
Intangible assets
Assets that are used as inputs to creating economic value
Assets that are a store of value

Which of the following sets of investment categories or products is MOST accurately described as being driven by beta rather than alpha?

Enhanced index and 130/30 funds
Enhanced index and long/short investing
Passive index and nonlinear returns
Passive index and absolute returns

Which of the following types of beta is most associated with active returns rather than with systematic risk premiums?

Classic beta
Bespoke beta
Alternative beta
Bulk beta

How are beta driven products generally described?

As requiring substantial information to implement
As difficult to create without relatively high costs
As having returns uncorrelated with the overall market
As attempting to capture systematic risk premiums

How is the alpha of a particular investment differentiated from the beta?

The alpha is ex post and is identified using option pricing models
The alpha is ex post and is identified using factor models
The alpha is ex ante and is identified using option pricing models
The alpha is ex ante and is identified using factor models

What is considered to be the most important task in distinguishing alpha from beta in the performance of an investment manager?

Identifying true systematic risk exposures
Observing alpha and properly deducing beta
Measuring the returns of relevant factors

There are several common reasons why alpha is argued to be a â€œzero sum gameâ€. Which of the following is NOT one of those reasons?

Investors have similar levels of wealth
Investors have similar risk tolerances
Investors have homogenous return expectations
Investors have similar tax rates

Which of the following is MOST accurate with regard to the information coefficient (IC) in the Fundamental Law of Active Management?

The IC is the correlation between portfolio returns and market returns across active bets
The IC is the correlation between portfolio returns and market returns through time
The IC is the correlation between forecasted returns and actual returns across active bets
The IC is the correlation between forecasted returns and actual returns through time

Portfolio XYZ is well diversified. It has a return of 10.5%, a portfolio beta of 1.2 and a standard deviation of 5%. Assume the risk free rate is 3% ...

0.9
1.2
1.5
6.25

Portfolio XYZ is well diversified. It has a return of 10.5%, a portfolio beta of 1.2 and a standard deviation of 5%. Assume the risk free rate is 3% ...

0.9
1.2
1.5
6.25

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Investment Risk and Portfolio Management MCQs