Fundamentals of Investing, 11e (Gitman/Joehnk/Smart)
Chapter 13 Managing Your Own Portfolios
1) Before analyzing needs and objectives, investors should first construct a portfolio.
2) A conservative asset allocation would rely heavily on bonds and short-term securities.
3) Utility stocks are often suitable for low-risk, current-income-oriented portfolios.
4) An investment portfolio should be built around the needs of the individual investor.
5) Asset allocation focuses on selecting specific securities within an asset class.
6) An investor’s portfolio should only contain securities that are suitable to the investor’s goals
and needs.
7) Marti is 31 years old and is saving for retirement. Which one of the following portfolio
allocations might best suit her situation if she is willing to accept a fair amount of risk in
exchange for long-term capital appreciation?
A) 60% bonds, 15% money funds and 25% real estate
B) 5% money funds, 10% bonds and 85% growth stocks
C) 25% bank CDs, 40% corporate bonds, 15% money market, 20% value stocks
D) 50% mortgage bonds, 5% money market, 45% municipal bonds
8) Asset allocation should focus on
A) the investor’s financial and family situation.
B) selection of individual securities within an asset class.
C) maximization of current income.
D) maximization of short-term profits.
9) An moderate asset allocation alternative might include
I. bonds.
II. common stocks.
III. foreign securities.
IV. options and commodities futures.
A) I & II only
B) I, III and IV only
C) I, II, and III only
D) I, II, III and IV
10) Which one of the following provides the greatest reduction in total risk?
A) diversification
B) asset allocation
C) security selection
D) beta reduction
11) The fixed-weightings approach to asset allocation
A) is based on an allocation of an equal percentage of the portfolio to each separate asset
category.
B) requires periodic rebalancing of the portfolio to maintain the desired weights.
C) is based on periodic adjustments to category weights in response to market changes.
D) uses stock-index futures and bond futures in a market timing strategy.
12) An asset allocation plan should consider which of the following factors?
I. economic outlook
II. capital preservation
III. changing investment goals
IV. investor risk tolerance
A) II only
B) II, III and IV only
C) I, III and IV only
D) I, II, III and IV
13) Fred and Martha are in their seventies and retired. Which one of the following sets of
portfolio statistics might best suit their situation if their primary investment goal is current
income with limited risk?
A) beta of 0.83 and a dividend yield of 6.3%
B) beta of 0.86, and a dividend yield of 4.6%
C) beta of 1.6 and a dividend yield of 6.4%
D) beta of 1.1 and a dividend yield of 5.4%
14) Fixed weightings, flexible weightings, and tactical asset allocation are three approaches to
asset allocation. Compare and contrast these three different approaches.
1) The Dow Jones Industrial Average (DJIA) includes 500 of the largest companies traded on U.
S. exchanges.
2) The key areas to monitor when evaluating your portfolio holdings are the overall performance
of both the economy and the financial markets, and the returns on your investments.
3) Once you establish a portfolio designed to achieve your investment goals, you can relax and
forget about your investments until such time as you need the funds.
4) Investors need to monitor economic and market activity to assess the potential impact these
factors can have on their investment portfolios.
5) Most investment professionals consider the Dow Jones Industrial Average (DJIA) to be the
most appropriate comparative gauge for evaluating the investment performance of a broadly
based common stock portfolio.
6) The S&P 500 Stock Composite Index and the NASDAQ Composite Index can be used to
represent the stock market as a whole.
7) If an investor’s portfolio is comprised of a broad range of common stocks, the best measure to
use as a basis of comparison of performance is the
A) Dow Jones Industrial Average (DJIA).
B) S&P 500 index.
C) Dow Jones Corporate Bond Index.
D) American Stock Exchange utilities index.
8) The S & P 500 Index is an appropriate benchmark for
A) diversified portfolios of large company stocks.
B) portfolios diversified among several asset classes such as stocks, bonds, and real estate.
C) diversified portfolios with a mix of large, small, and mid-cap stocks.
D) diversified portfolios of mid-cap and small company stocks.
9) To form an assessment of the future performance of investments, investors should monitor
A) The S&P 500 Index.
B) The Value Line Index.
C) The Dow Jones Industrial Average.
D) economic and market activity
10) Lipper indexes are to assess the performance of
I. equity funds.
II. bond funds.
III. money market funds.
IV. Real Estate Investment Trusts (REITS).
A) I and II only
B) I and III only
C) I, II, and III only
D) I, II, III, and IV
11) The holding period return (HPR) of one’s portfolio should be compared to investment goals
I. to assess whether the proper rate of return is being earned for the risk involved.
II. to be sure one’s portfolio is outperforming the S&P 500 Index.
III. to isolate any problem investments.
IV. to determine when to change benchmarks from the S&P 500 to the NASDAQ Composite
Index.
A) I and III only
B) II and IV only
C) I, II, and III only
D) II, III, and IV only
1) The holding period return measures only the capital appreciation of an investment.
2) Returns for periods greater than one year should be measured using the internal rate of return.
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3) Holding period return (HPR) captures total return performance by considering current income
and capital gains and is most appropriate for holding periods of one year or less.
4) A rational investor will require the same return from a corporate security as from a
government security.
5) A rational investor will require the same after-tax return from a corporate security as from a
government security.
6) If the holding period return (HPR) of an investment is 20 percent before taxes for a nine
month period, an investor in the 30 percent tax bracket would have an after-tax HPR of 14
percent.
7) The holding period return calculation for a portfolio time-weights portfolio additions and
deletions in accordance with the number of months they were in the portfolio.
8) Only capital gains that have been realized should be included in the measurement of a
portfolio’s return over a given period of time.
9) For a stock investment, the dividend yield is calculated by
A) dividing a stock’s annual cash dividend by its price.
B) dividing a stock’s price by its annual cash dividend.
C) multiplying a stock’s semi-annual dividend by two.
D) dividing the annual change in the stock’s price plus its annual dividend amount by the
beginning of the year price.
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10) The holding period return for mutual funds should be based on
A) net asset value exclusively.
B) dividend income exclusively
C) capital gains distributions exclusively
D) capital gains distributions and dividends.
11) The holding period return (HPR)
A) reflects only capital gains and losses for investment periods of one year or less.
B) calculates the annual dividend yield on stocks or current interest yield on bonds.
C) is the most appropriate measure of returns for an investment period exceeding one year.
D) can be used to determine the actual total return on stocks, bonds, and other investments for
periods of one year or less.
12) To compute the holding period return on a bond investment, the investor should divide the
purchase price of the bond into
A) any increase or decrease in the bond’s price.
B) the annual coupon payment.
C) the bond’s yield to maturity.
D) coupon payments received plus or minus any change in the bond’s price.
13) Juan’s investment portfolio was valued at $125,640 at the beginning of the year. During the
year, Juan received $603 in interest income and $298 in dividend income. Juan also sold shares
of stock and realized $1,459 in capital gains. Juan’s portfolio is valued at $142,608 at the end of
the year. All income and realized gains were reinvested. No funds were contributed or withdrawn
during the year. What is the amount of income Juan must declare this year for income tax
purposes?
A) $0
B) $901
C) $2,360
D) $19,328
14) On January 1, Stacy’s portfolio was valued at $96,534. During the year Stacy received
$3,285 in interest and $4,100 in dividends. She also sold one stock at a gain of $850. The value
of the portfolio on December 31 of the same year was $113,201. At the end of June, Stacy
withdrew $5,000 from the portfolio. What is the holding period return for the year?
A) 25.1%
B) 25.8%
C) 26.5%
D) 27.2%
15) Six months ago, Suzanne purchased a stock for $28 a share. Today she sold the stock at a
price of $32 a share. During the time she owned the stock, she received a total of $1.30 in
dividends per share. What is her holding period return?
A) 16.6%
B) 18.9%
C) 33.2%
D) 37.8%
16) Ten months ago, Junior purchased a stock for $14 a share. The stock pays a quarterly
dividend of $0.50 per share. Today, Junior sold the stock for $15 a share. What is his holding
period return?
A) 10.0%
B) 10.7%
C) 16.7%
D) 17.9%
17) Tim purchased a stock ten months ago for $14 a share, received a $1 dividend per share last
month, and sold the stock today for $16 per share. Tim has a marginal tax rate of 30%. Both
capital gains for securities held more than one year and dividend income is taxed at 15%. What is
Tim’s after-tax holding period return?
A) 14.1%
B) 15.9%
C) 16.1%
D) 18.2%
18) On February 19, 2004, Angela purchased 100 shares of ABC stock at a total cost of
$1,712.50. She received a total of $125.00 in dividends and sold the stock today, February 22,
2005. Her net proceeds from the sale are $1,892.40. Angela has a combined state and federal
marginal tax rate of 32%. Her combined state and federal tax rate on both her capital gains in
excess of one year and her dividend income is 18%. What is Angela’s after-tax holding period
return on her investment in ABC stock?
A) 11.0%
B) 12.1%
C) 13.2%
D) 14.6%
19) An investor in the 25% marginal tax bracket purchased a bond for $983, received $85 in
interest, and then sold the bond for $955 after holding it for six months. The tax rate for capital
gains with holding periods in excess of one year is 15%. What are the pre-tax and post-tax
holding period returns?
A) 5.8%; 4.3%
B) 6.0%; 4.5%
C) 5.8%; 4.5%
D) 6.0%; 4.3%
20) Investors who wish to minimize the effect of taxes on their investment returns should try to
avoid
A) dividend paying stocks.
B) short-term capital gains.
C) long-term capital gains.
D) municipal bonds.
21) Maria purchased $5,000 of no-load mutual fund shares just over a year ago. She received
$136 in dividend income and $201 in long-term capital gains distributions. Today she sold her
shares for $5,062. Maria is in the 25% marginal tax bracket. Capital gains with holding periods
in excess of one year and dividend income are taxed at 15%. What is Maria’s after-tax holding
period return?
A) 6.0%
B) 6.6%
C) 6.8%
D) 8.0%
22) On January 1, Tim’s portfolio was valued at $432,098. During the year Tim received $10,563
in interest and $15,060 in dividends. He also sold stock at a net loss of $12,870 and used the
proceeds to purchase another stock. Tim did not contribute any more funds nor withdraw any
funds during the year. On December 31 of the same year, Tim’s portfolio was valued at
$398,189. What is the holding period return for the year?
A) -5.3%
B) -4.9%
C) -2.1%
D) -1.9%
1) Sharpe’s measure of portfolio performance adjusts for risk by dividing total portfolio return by
the portfolio beta.
2) Sharpe’s measure of portfolio performance compares the risk premium on a portfolio to the
portfolio’s standard deviation of return.
3) Sharpe’s measure is a measure of the risk premium per unit of total risk.
4) Jensen’s measure of portfolio performance compares the risk premium on a portfolio to the
portfolio’s beta.
5) Sharpe’s measure, Treynor’s measure, and Jensen’s measure all focus on non-diversifiable risk.
6) Sharpe measures total risk while Treynor and Jensen measure only systematic risk.
7) A Jensen measure of 2.5% means that a security earned 2.5% more than the overall market.
8) Portfolio revision is the ongoing process of systematically studying the issues in the portfolio
and selling certain issues and purchasing others as the means of maintaining a portfolio that best
meets the investor’s objectives.
9) Which of the following are reasons to consider selling an investment that is currently in a
portfolio?
I. The investment has met the original objective.
II. Better investment opportunities currently exist.
III. The outlook for the investment has improved.
IV. The investment has not met expectations and no change is expected.
A) I, II and IV only
B) I, III and IV only
C) I, II and III only
D) I, II, III and IV
10) A problem investment
A) requires immediate attention.
B) is one you would buy if you did not already own it.
C) is defined as any investment with unrealized losses.
D) should be left alone and given time to correct itself.
11) Allison’s portfolio has an expected return of 14% and a standard deviation of of 20%.
Brianna’s portfolio has an expected rate of return of 11% and a standard deviation of 12%. The
risk-free rate is 3%. According to the Sharpe measure,
A) Allison has the better portfolio.
B) Brianna has the better portfolio.
C) The portfolio’s are equally desirable.
D) The answer depends on Allison and Brianna’s risk tolerance.
12) Ella owns a stock with a beta of 1.34 and a standard deviation of 16.4%. The stock has a total
return of 14.8%. The market risk premium is 8.5%, while the return on the market portfolio was
12.0%. What is the value of Sharpe’s measure for Ella’s portfolio?
A) 0.21
B) 0.38
C) 0.69
D) 0.90
13) Sharpe’s measure of portfolio performance compares the risk premium on a portfolio to
A) a broad-based market index such as the S&P 500 index.
B) the portfolio’s standard deviation of return.
C) the portfolio’s beta.
D) the prevailing risk-free rate of return.