PM Assignment

PORTFOLIO MANAGEMENT (BFIA)

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Amity Campus Uttar Pradesh

India 201303

ASSIGNMENTS PROGRAM: BFIA SEMESTER-VI

Subject Name: PORTFOLIO MANAGEMENT (BFIA)

Study COUNTRY: SOMALIA

Roll Number (Reg. No.): BFIA01512010-2013019

Student Name: MOHAMED ABDULLAHI KHALAF

INSTRUCTIONS

a) Students are required to submit all three assignment sets.

ASSIGNMENT DETAILS MARKS

Assignment A Five Subjective Questions 10

Assignment B Three Subjective Questions + Case Study 10

Assignment C Objective or one line Questions 10

b) Total weight-age given to these assignments is 30%. OR 30 Marks c) All assignments are to be completed as typed in word/pdf. d) All questions are required to be attempted.

e) All the three assignments are to be completed by due dates and need to be submitted for evaluation by Amity University. f) The students have to attach a scanned signature in the form.

Signature : _________________________

Date: 01 April, 2013

( ) Tick mark in front of the assignments submitted

Assignment A Assignment B Assignment C

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PORTFOLIO MANAGEMENT (BFIA)

Assignment A

Q.1 Explain the fundamental of portfolio management.

Answer for Q1A

Determining the mix of assets to hold in a portfolio is referred to as portfolio management. A fundamental aspect of portfolio management is choosing assets which are consistent with the portfolio holder's investment objectives and risk tolerance. The

ultimate goal of portfolio management is to achieve the optimum return for a given level of risk. Investors must balance risk and performance in making portfolio management decisions. Portfolio management strategies may be either active or passive. An investor who prefers passive portfolio management will likely choose to invest in low cost index funds with the goal of mirroring the market's performance. An investor who prefers active portfolio management will choose managed funds which have the potential to

outperform the market. Investors are generally charged higher initial fees and annual

management fees for active portfolio management.

Q.2 Discuss different investment alternative available to an investor. Answer for Q2A

Equity

investments in equity should only be done for the long term (anything more than 5

years) to earn decent returns. Risk of investing in equities is high and so the returns are also high. You could dabble in the stock market broadly in three ways.

1. Directly by buying and selling shares on the stock exchanges BSE/NSE 2. Take the plunge via the Mutual Fund route wherein the options available

are : equity diversified, balanced, tax saving ELSS funds, thematic, exchange traded or index funds

3. Investing in ULIPs(insurance plans) via their equity funds.

Debt

Debt investment can be done for the short term and long term as well. Risk here is very low and so return is low as well. Investing in debt can be done by the following ways.

1. Fixed Deposits, POMIS, NSC, PPF, NPS, Bonds, Kisan Vikas Patra, Senior Citizen Saving

Schemes 2. Debt mutual funds (balanced, floating rate, gilt, liquid and liquid plus) also

offer another way to do so. 3. Traditional insurance policies (money back, whole life, endowment) and the debt

portions of ULIPs can be a mechanism as well.

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Real Estate

This is again for the long term with a high risk and very low liquidity factor. Liquidity is defined as the ease with which you could sell your investment for cash quickly. Investing in property can be done by :

1. Buying apartments and plots in either residential or commercial areas 2. Or buying Real Estate Mutual Funds.

Commodities

For small investors, exposure to gold is the right step to invest into commodities. The risk is moderate/high in this class of investment and it is highly volatile as well.

1. One could buy gold and silver bars/coins or jewellery and 2. Invest in Gold exchange traded mutual funds.

Q.3 Explain the Money Weighted Rate of Return (MWROR) on a portfolio.

Answer for Q3A

This is a simple method used to compute the overall return on Capital Invested over a specified period of time. It is calculated by dividing the total return over

a period from a portfolio by the weighted average sum invested in the portfolio over

the period. Return considers both capital appreciation (and loss) and income. This

rate can be thought of as the rate of interest which the initial portfolio plus net new

money would have had to earn in a deposit account in order to accumulate to the

actual value of the portfolio at the end of the year.

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This is useful for an individual but inadequate and sometimes misleading for an

institutional investor.

Q.4. Explain Portfolio Analysis and selection decision with the help of single index

model. Answer for Q4A

The single-index model (SIM) is a simple asset pricing model commonly used in the finance industry to measure risk and return of a stock. Mathematically the SIM is

expressed as: Where:

rit is return to stock i in period t

rf is the risk free rate (i.e. the interest rate on treasury bills)

rmt is the return to the market portfolio in period t is the stock's alpha, or

abnormal return is the stocks beta, or responsiveness to the market return

These equations show that the stock return is influenced by the market (beta), has a firm specific expected value (alpha) and firm-specific unexpected component (residual). Each stock's performance is in relation to the performance of a market index (such as the All Ordinaries). Security analysts often use the SIM for such functions as computing stock betas, evaluating stock selection skills, and conducting event studies.

The index model is based on the following:

Most stocks have a positive covariance because they all respond similarly to

macroeconomic factors.

However, some firms are more sensitive to these factors than others, and this firm-specific variance is typically denoted by its beta (), which measures its variance compared to the market for one or more economic factors.

Covariance among securities results from differing responses to macroeconomic

factors. Hence, the covariance of each stock can be found by multiplying their betas

and the market variance:

Cov (RI, Rk) = i k 2. This last equation greatly reduces the computations

required to determine covariance because otherwise the covariance of the

securities within a portfolio must be calculated using historical returns, and the covariance of each possible pair of securities in the portfolio must be calculated independently.

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Q.5 Discuss traditional performance measure of portfolio.

Answer for Q5A

Traditional Performance Measures

1. Sharpe measure:-

Sharpe Portfolio Performance Measure (aka: reward to variability ratio) This

measure was developed in 1966. It is as follows:

Si=

It is VERY similar to Treynor's measure, except it uses the total risk of the

portfolio rather than just the systematic risk. The Sharpe measure calculates the

risk premium earned per unit of total risk. In theory, the S measure compares

portfolios on the CML, whereas the T measure compares portfolios on the SML.

2. Treynor measures:-

Treynor Portfolio Performance Measure (aka: reward to volatility ratio)

This measure was developed by Jack Treynor in 1965. Treynor (helped developed CAPM) argues that, using the characteristic line, one can determine the relationship between a security and the market.

Deviations from the characteristic line (unique returns) should cancel out if you

have a fully diversified portfolio.

Treynor's Composite Performance Measure: He was interested in a performance measure that would apply to ALL investors regardless of their risk preferences. He argued that investors would prefer a CML with a higher slope (as it would place them on a higher utility curve). The slope of this portfolio possibility line is:

Ti=

A larger Ti value indicates a larger slope and a better portfolio for ALL INVESTORS REGARDLESS OF THEIR RISK PREFERENCES. The numerator represents the risk premium and the denominator represents the risk of the portfolio; thus the value, T, represents the portfolio's return per unit of systematic risk. All risk adverse investors would want to maximize this value.

The Treynor measure only measures systematic risk--it automatically

assumes an adequately diversified portfolio.

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You can compare the T measures for different portfolios. The higher the T value, the better the portfolio performance.

3. Jensen measure (Alpha):-

Jenson Portfolio Performance Measure (aka differential return

measure)

This measure (as are all the previous measures) is based on the CAPM.

We can express the expectations formula (the above formula) in terms of realized rates of return by adding an error term to reflect the difference between E(Rj) vs actual Rj:

Rjt =

Using this format, one would not expect an intercept in the regression. However, if we had superior portfolio managers who were actively seeking out undervalued securities, they could earn a higher risk-adjusted return than those implied in the model. So, if we examined returns of superior portfolios, they would have a significant positive intercept. An inferior manager would have a significant negative intercept. A manager that was not clearly superior or inferior would have a statistically insignificant intercept.

4. And Performance measurement in practice

Assignment B

Q.6 Explain the Security market line & discuss CAPM in detail.

Answer for Q6B

Explain the Security market line:- Unlike the CML, which considers the total risk as a measure of variability of returns, SML takes into account only the systematic risk, which is market related and is not possible to reduce or eliminate by diversification. Beta is the measure of risk of a security relative to the whole market, and is used in the SML.

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Since the unsystematic risk is already taken care of by diversification in the construction of an efficient portfolio, it is desirable to develop an alternative to CML which will use Beta as the independent variable and can be adopted for use in portfolio management and in purchase of individual securities. Such a line is called Security Market Line, which depicts a linear relationship between expected return and the systematic risk.

SML is Security Market Line, OS is the risk-free return, OP is the return of the market, whose Beta is 1; those below Beta 1 are defensive and others are aggressive scrips in the market.

SML can be represented symbolically by an equation as Ri = Rf + Bi (Rm - Rf)

Ri is the return on the security, i, Rf

is Risk-free return

Rm is Market return.

Bi is Beta of Scrip i related to Market Risk

CAPM

The CAPM was developed to explain how risky securities are priced in market and this was attributed to experts like Sharpe and Lintner. Markowitz theory being more theoretical, CAPM aims at a more practical approach to stock valuation.

It is no doubt based on the mean-variance approach to risk for assessment of

investment as developed by Markowitz. It explains the behavioral pattern of investors

in building up portfolios.

CAPM-Assumptions

The CAPM is based on certain assumptions some of which are common to CAPM and

MPT. CAPM is it1 L1Ct developed as part of MPT (Modern portfolio Theory). The

assumptions are first set out below:

1. The investor aims at maximizing the utility of his wealth, rather than the wealth

or rerun.

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2. Investors have similar expectations of Risk and Return.

3. Investors make investment decision on a rational basis, depending on their

assessment of risk and return.

4. Investors will have free access to all available information at no cost and no loss

of time.

5. Investors should have identical time horizons which again is highly

unrealistic.

While the above assumptions are common to both CAPM and MPT, some assumptions are specific to CAPM. Thus, there is a risk free asset, which gives risk free return. Investors can borrow and lend unlimited amounts at the same price. 1rus assumption of risk free asset transforms the curved efficient

frontier line to a linear one. Adding a risk free asset, or borrowing at the risk free

rate can reduce risk.

Besides, it is also necessary to assume in CAPM that total asset quantity is

fixed and all assets are marketable and divisible. This assumption implies that the liquidity requirement of investors is ignored and there will no new issues, which are both unrealistic.

After the brief review of the above assumptions we can summarize the

requirements for CAPM as follows:

Risk is measured by variance of expected returns. There are two components of Risk - systematic (non-diversifiable) and unsystematic (diversifiable). For diversifiable risk, the investor makes a proper diversification to reduce the risk and for the non-diversifiable portion, he uses the relevant Beta measure to adjust to his requirement or preferences. Due to the possibility of risk free

asset and lending and borrowing at the free rate, the investor has two components of the portfolio - risk free assets and the risky market assets. His total return is summation from the above two components. Under CAPM, the equilibrium situation arises when all frictions, like taxes, divisibility transaction costs and different risk-free borrowing and lending rates are assumed away. Equilibrium will be brought about by changes in prices due to changes in demand and supply.

The assumptions of CAPM are that the market is in equilibrium and the expected rate

of return is equal to the required rate of return for a given level of risk or Beta. CAPM

presents a linear relationship between the required rate of return of a security and

relates it to market related risk or Beta, which cannot be avoided. The equation for the

CAPM Theory is.

Rj =Rf+Bj (RM-Rf) Rj is expected rate of

return on security j. measure for the

Rf is risk free turn.

Bj is Beta coefficient - a risk

non diversifiable part of total

Risk.

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and RM

excess return for the extra risk.

Rm is return on Market Portfolio

Rf is the

Q.7 Explain modern portfolio management theory.

Answer for Q7B

Modern portfolio management theory was introduced by Professor Harry Markowitz in 1952, marking the beginning of what is known as MPT. He demonstrated that for every level of risk it is possible to construct an investment portfolio that,

mathematically, delivers the maximum expected investment return. Clearly, different portfolios will generate different levels of return and expose an investor to different levels of risk. A fundamental principle of MPT is that the risk of the portfolio should be considered as a whole, and not individual assets in isolation. While individual assets do have a bearing on the overall level of risk the investor is exposed to, the correlation

between the assets in the portfolio has an even greater bearing. In other words,

because the price of one asset typically does not move up and down in line with the

price of another, there are significant diversification benefits to be gained

by including a range of different asset classes in the clients portfolio. Such

diversification reduces risk, essentially because you dont have all your eggs in one

basket.

MPT aims to build portfolios that for each given level of risk have the highest

expected return these are considered efficient portfolios. Once identified these efficient portfolios can be graphically represented (in terms of risk and return) to demonstrate the Efficient Frontier. MPT states that portfolios that do not lie on the Efficient Frontier are inefficient (as otherwise you can get higher returns for the same risk). Hence, the asset allocation process should first establish the level of risk to which clients are prepared to expose their investment, and then determine a portfolio that lies on the Efficient Frontier.

Q.8 Discuss Arbitrage Pricing Theory.

Answer for Q8B

The Arbitrage Pricing Theory (APT) was developed primarily by Ross (1976a,

1976b).

It is a one-period model in which every investor believes that the stochastic

properties of returns of capital assets are consistent with a factor structure. Ross

argues that if equilibrium prices offer no arbitrage opportunities over

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static portfolios of the assets, then the expected returns on the assets are approximately linearly related to the factor loadings. (The factor loadings, or betas, are proportional to the returns covariance with the factors.).

Ross (1976a) heuristic argument for the theory is based on the preclusion of

arbitrage.

Ross formal proof shows that the linear pricing relation is a necessary condition for equilibrium in a market where agents maximize certain types of utility. The subsequent work, which is surveyed below, de- rives either from the assumption of the preclusion of arbitrage or the equilibrium of utility- maximization. A linear relation between the expected returns and the betas is tantamount to an identification of the stochastic discount factor (SDF).

The APT is a substitute for the Capital Asset Pricing Model (CAPM) in that both assert

a linear relation between assets expected returns and their covariance with other random variables. (In the CAPM, the covariance is with the market portfolios return.) The covariance is interpreted as a measure of risk that investors cannot avoid by diversification. The slope coefficient in the linear relation between the expected returns and the covariance is interpreted as a risk premium. Such a relation is closely tied to mean-variance efficiency. Merely stating that some collection of portfolios (or even a single portfolio) is mean-variance efficient relative to the mean-variance frontier spanned by the existing assets does not constitute a test of the APT, because one can always find a mean-variance efficient portfolio. Consequently, as a test of the APT it is not sufficient to merely show that a set of factor portfolios satisfies the linear relation between the expected return and its covariance with the factors portfolios. The large numbers of factors proposed in the literature and the variety of statistical or ad hoc procedures to find them indicate that a definitive insight on the topic is still missing.

Unfortunately, the APT does not necessarily preclude arbitrage opportunities over dynamic portfolios of the existing assets. Therefore, the applications of the APT in the evaluation of managed portfolios contradict at least the spirit of the APT, which obtains price restrictions by assuming the absence of arbitrage. The arbitrage pricing theory is an alternative paradigm used to calculate equilibrium expected returns on financial assets. As its name suggests, it rests on the notion that well-functioning financial markets should be arbitrage-free. This, using a factor model of asset returns, implies restrictions on the

relationships between asset returns and generates an equilibrium pricing

relationship.

The arbitrage pricing theory (APT) gives an alternative to the CAPM as a method to

compute the expected returns on stocks. The basis for the APT is a factor model of stock

returns, and we will define and discuss these models first. From there we will

demonstrate how to derive expected returns using the idea that the returns on stocks,

which are exposed to a common set of factors, must be mutually consistent, given each

stocks sensitivity to each factor.

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SOLUTION OF THE CASE STUDY:

Futures Trading Activity And Predictable Foreign Exchange Market

Movements.

According to the paper, there are various types of the relationship between futures trading activity, by trader type and returns over short horizons in five foreign currency futures markets-

These are the observations:-

1. Transforming trading activity into a sentiment measure, we find that

speculator sentiment is positively related to future returns. 2. Hedger sentiment co varies negatively with future returns.

5. Based on equilibrium pricing models that futures risk premiums are determined by both market risk and hedging pressure, profits to speculators are in general compensation for bearing risk.

3. Extreme sentiment by trader type is more correlated with future market

movements than moderate sentiment.

4. on average hedgers lose to speculators on the futures market. The research that the relationship between speculator sentiment and returns remains positive and significant after accounting for market risk and becomes insignificant after hedging pressure is accounted for suggests that hedging

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pressure is an important risk in currency futures markets, which has been

ignored in the prior. Assignment C

1. The Money Weighted Rate of Return (MWROR) on a portfolio is equivalent to

(a) The Time Weighted Rate of Return (TWROR) ( )

(b) The portfolios internal rate of return

(c) The arithmetic average return

(d) The Linked Internal Rate of Return (LIROR) (e)

Net Present Value (NPV).

2. As per the Capital Market Theory, those with low degrees of risk aversion will leverage their investments in the risky portfolio and choose.

(a) A portfolio with the same risk-return characteristics as chosen by investors

with high degrees of risk aversion.

(b) A risky portfolio with the same expected return but higher risk than chosen by

investors with high degrees of risk aversion.

(c) A risky portfolio with a higher expected return but the same level of risk as

chosen by investors with high degrees of risk aversion. ( )

(d) A risky portfolio with a higher expected return and higher level of risk than chosen

by investors with high degrees of risk aversion.

(e) The same portfolio irrespective of the degree of risk aversion.

3. According to Bielard and Kaiser five way model of investor classification which of

the following category of investors possess average confidence level and mode of

action?

(a) Individualists.

(b) Adventurers ( )

(c) Guardians (d) Celebrities

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(e) Straight Arrows.

4 .The equation of Capital Market Line (CML) is used for estimating

I. Jensens alpha. II. Return from selectivity.

III. Return from net selectivity.

IV. Return from inadequate diversification. (a)

Only (I) above

(b) Only (III) above

(c) Both (III) and (IV) above

(d) (I), (II) and (III) above. ( ) 5. The efficient market hypothesis .

A) implies that security prices properly reflect information available to investors

B) has little empirical validity

C) implies that active traders will find it difficult to outperform a buy-and-hold

strategy

D) B and C

E) A and C( )

6.The following are four stocks of a portfolio:

Stock Market Value (Rs.) Beta

A 2,00,000 0.75

B 3,00,000 0.87

C 3,50,000 1.20

D 7,50,000 1.35

If expected return on the market portfolio is 12% and the risk free rate is 5%, the expected return on the portfolio is

(a) 10.50% ( )

(b) 10.75% (c) 11.50% (d) 12.77% (e) 13.06%

7. Which of the following is not a dynamic strategy for asset allocation? (a)

Constant mix

(b) Risk tolerance method

(c) Buy-and-hold

(d) Constant-proportion portfolio insurance

(e) Option-based portfolio insurance. ( )

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8. The portfolio rebalancing should ensure that (a)

The systematic risk remains constant ( ) (b) The

unsystematic risk remains at unity

(c) The systematic risk remains at unity

(d) The systematic risk remains at zero

(e) The total risk does not exceed unity.

9. The Arbitrage Pricing Theory (APT) differs from the single-factor Capital

Asset

Pricing Model (CAPM) because the APT: A.

Place more emphasis on market risk

B. Minimize the importance of diversification

C. Recognize multiple unsystematic risk factors

D. Recognize multiple systematic risk factors ( ) 10. In contrast to Capital Asset Pricing Model (CAPM), Arbitrage Pricing Theory

(APT):

A. Requires that markets be in equilibrium

B. Uses risk premiums based on micro-economic variables

C. Specifies the exact number of and identifies specific factors that determine

expected returns

D. Does not require the restrictive assumption concerning the market portfolio.

. ( )

11. If all securities are fairly priced (relative to the intrinsic, or true, value) an

arbitrage opportunity exist

A. Must

B. Might ( )

C. Must not D. Non of the above

12. Assume that a company is announcing an unexpectedly large dividend to its

shareholders. In an efficient market without information leakage, one might expect:

A. An abnormal price change at the announcement ( ) B.

An abnormal price change before the announcement C. An

abnormal price change after the announcement

D. No abnormal price change before or after the announcement

13. According to the efficient market hypothesis:: A. High-beta stocks are consistently overpriced

B. Low-beta stocks are consistently overpriced

C. Positive alpha on stocks will quickly disappear ( )

D. Negative alpha stocks consistently yield low return for arbitrageurs

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.

14. According to the efficient markets view, value stocks earn higher expected return

than growth stocks because:

A. Value stocks are riskier than growth stock

B. Value stocks are less risky than growth stock

C. Value stocks have higher expected future payoffs than growth stock

D. Value stocks have lower expected future payoffs than growth stock ( )

.

15. An investor will take as large a position as possible when an equilibrium price

relationship is violated. This is an example of .

A. A dominance argument

B. Tthe mean-variance efficiency frontier

C. A risk-free arbitrage ( )

D. The capital asset pricing model

E. None of the above

16. If portfolios are priced using APT model, which of the following measures of

portfolio performance can be used to analyze performance of a portfolio?

(a) Sharpe ratio ( )

(b) Treynor ratio

(c) Jensens alpha (d) Famas net selectivity

(e) French model.

17. A high ratio of net selectivity to total selectivity for a portfolio indicates

(a) High risk appetite of investor

(b) Poorly diversified portfolio

(c) Superior stock selection skills ( )

(d) Low beta of the portfolio (e) High risk adverse nature of investor.

18. may be responsible for the prevalence of active versus passive investments management.

A. Forecasting errors

B. Overconfidence ( )

C. Mental accounting

19. Assume the U.S. government was to decide to increase the budget deficit. This

action will most likely cause to increase.

A. interest rates

B. government borrowing

C. unemployment

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D. both A and B( )

E. none of the above

20. Which of the following indexes of economic indicators are leading

indicators:

A. Average weekly hours of production workers

B. Employees on non-agricultural payrolls

C. Personal income less transfer payments

D. Manufacturers new orders (consumer goods and materials industries) E. Only b) and c)

F. Only a) and d) ( ) 21. What is the expected return of a portfolio whose beta is one? (a)

The risk-free rate ( )

(b) Zero rate of return (c) A negative rate of return (d) The market rate of return (e) Risk premium.

22. Which of the following statements about portfolio diversification is true?

(a) For risk-reduction benefits of diversification to occur, there must be at least

30-35 securities in a portfolio

(b) Typically, as more securities are added to a portfolio, beta would be

expected to rise at a decreasing rate

(c) Because divers ification reduces a portfolios total risk, it necessarily

reduces the

portfolios expected return

(d) A well diversified portfolio can eliminate unsystematic risk ( )

(e) In a well diversified portfolio, systematic risk does not exist.

23. Some economists believe that the anomalies literature is consistent with

investors

and .

A. ability to always process information correctly and therefore they infer correct probability distributions about future rates of return; given a probability distribution of returns, they always make consistent and optimal decisions . B. inability to always process information correctly and therefore they infer incorrect probability distributions about future rates of return; given a probability distribution of returns, they always make consistent and optimal decisions.

C. ability to always process information correctly and therefore they infer

correct probability distributions about future rates of return; given a

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probability distribution of returns, they often make inconsistent or suboptimal

decisions

D. inability to always process information correctly and therefore they infer incorrect probability distributions about future rates of return; given a probability distribution of returns, they often make inconsistent or suboptimal

decisions( )


24. Information processing errors consist of I) forecasting errors II) overconfidence III) conservatism IV) framing

A. I and II B.

I and III C. III

and IV D. IV

only

E. I, II and III ( ) 25. Forecasting errors are potentially important because

A. research suggests that people underweight recent information.

B. research suggests that people overweight recent information. ( )

C. research suggests that people correctly weight recent information.

D. either A or B depending on whether the information was good or bad. E.

none of the above.

26. DeBondt and Thaler believe that high P/E result from investors

A. earnings expectations that are too extreme. ( )

B. earnings expectations that are not extreme enough. C.

stock price expectations that are too extreme.

D. stock price expectations that are not extreme enough. E.

none of the above.

27. If a person gives too much weight to recent information compared to prior beliefs,

they would make errors.

A. framing

B. selection bias C.

overconfidence D.

conservatism

E. forecasting ( ) 28. Single men trade far more often than women. This is due to greater

among men.

A. framing

B. regret avoidance

C. overconfidence ( )

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D.conservatism E. none of the above

29. may be responsible for the prevalence of active versus passive

investments management.

A. Forecasting errors

B. Overconfidence ( ) C.

Mental accounting D.

Conservatism

E. Regret avoidance

30. Barber and Odean (2000) ranked portfolios by turnover and report that the difference in return between the highest and lowest turnover portfolios is 7% per year. They attribute this to

A. overconfidence ( )

B. framing

C. regret avoidance

D.sample neglect

E. all of the above

They attribute this to overconfidence.

31. bias means that investors are too slow in updating their beliefs in response to evidence.

A. framing

B. regret avoidance

C. overconfidence

D. conservatism ( )


Conservatism bias means that investors are too slow in updating their beliefs in

response to evidence.

32. Which of the following types of asset allocations use Monte Carlo

Simulation to find the outcomes of each asset mix? (a)

Tactical Asset Allocation

(b) Insured Asset Allocation ( )

(c) Strategic Asset Allocation (d) Integrated Asset Allocation

(e) Disintegrated Asset Allocation.

33. An example of is that a person may reject an investment when it is posed

in terms of risk surrounding potential gains but may accept the same investment if it is

posed in terms of risk surrounding potential losses.

A. framing ( )

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B. regret avoidance C. overconfidence D. conservatism


34. Stat man (1977) argues that is consistent with some investors' irrational preference for stocks with high cash dividends and with a tendency to hold losing positions too long.

A. mental accounting ( )

B. regret avoidance

C. overconfidence D.

conservatism


35. Arbitrageurs may be unable to exploit behavioral biases due to

.

I) fundamental risk II) implementation costs III) model risk IV) conservatism V)

regret avoidance

A. I and II only

B. I, II, and III ( )

C. I, II, III, and V D. II, III, and IV E. IV and V

36. Underpriced stocks can reach their equilibrium return, if

I. Their price is increased.

II. Their dividend is decreased. III.

Their dividend is increased.

IV. Market turns out to be very volatile. (a)

Only (I) above

(b) Only (III) above

(c) Both (I) and (II) above ( )

(d) Both (II) and (III) above (e) All (I), (II), (III) and (IV) above.

37. was the grandfather of technical analysis. A.

Harry Markowitz

B. William Sharpe

C. Charles Dow ( ) D. Benjamin Graham E.

none of the above

38. The goal of the Dow Theory is to

A. Identify head and shoulder patterns. B.

Identify breakaway points.

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C. Identify resistance levels. D.

Identify support levels.

E. Identify long-term trends. ( )

39. The Dow Theory posits that the three forces that simultaneously affect stock

prices are

.

I) primary trend II) intermediate trend III) momentum trend IV) minor trend V)

contrarian trend

A. I, II, and III B. II,

III, and IV C. III, IV and V D. I, II, and IV

E. I, III, and V( ) 40. The Elliot Wave Theory . A. is a recent variation of the Dow Theory

B. suggests that stock prices can be described by a set of wave patterns

C. is similar to the Kondratieff Wave theory

D.A and B

E. A, B, and C( )

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