Examination. Lesson 5 Portfolio Management. ready. EXAMINATION NUMBER:

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1 Lesson 5 Portfolio Management EXAMINATION NUMBER: Whichever method you use in submitting your exam answers to the school, you must use the number above. For the quickest test results, go to When you feel confident that you have mastered the material in Lesson 5, go to and submit your answers online. If you don t have access to the Internet, you can phone in or mail in your exam. Submit your answers for this examination as soon as you complete it. Do not wait until another examination is ready. Questions 1 20: Select the one best answer to each question. 1. Base your answer to this question on contents of Exhibit 22.4 on page 821 of your textbook. Use the January 1991 December 1995 data only. Strictly on the basis of the correlation of returns, investments in which three countries would yield the greatest diversification? A. Brazil, Hungary, Indonesia B. Turkey, Korea, Chile C. Turkey, India, Colombia D. Turkey, Brazil, Malaysia Examination 149

2 2. What special advantage do mutual funds confer for investing in emerging markets? A. Emerging markets typically yield higher rates of returns for a given investment period because risk is relatively high. B. The correlation coefficients of returns between emerging and established markets are generally negative. C. Emerging funds allow investors to invest in specific markets even though they aren t familiar with corporations, laws, and particulars of investing in those markets. D. Emerging market mutual funds provide diversification not available in global or international funds. 3. Which of the following investments would certainly increase your risk exposure if most of your portfolio is dominated by U.S. investments? A. International investments characterized by a correlation with U.S. investments near zero B. International investments with high historical rates of return and, therefore, to the right side of the security market line C. A mix of European and Pacific Basin stocks purchased through an international mutual fund D. International investments in countries where the exchange rate fluctuates excessively 4. If you were supervisor of a mutual fund investment manager working for an international growth fund, how would you interpret the following situation? The manager recommends purchase of stock in General Electric, a New York based corporation. Her rationale for the purchase is based on the fact that General Electric s operations and revenue are truly international, with a substantial proportion of operations and revenue from over a dozen countries. A. If the manager were permitted to make the purchase, it would violate the fund s investment policy. B. General Electric s international exposure would enhance the fund s diversification. C. General Electric would add to the fund s diversification, but the corporation s large size is contrary to the growth objective for the fund. D. General Electric s diverse operations are a favorable attribute, and the company s growth would enhance the fund s growth objective. 5. If you wanted international diversification but wanted to decide which countries you would invest in, which strategy would you use? A. Invest through ishares country-specific exchange-traded funds. B. Invest through a global mutual fund. C. Invest through World Equity Benchmark shares. D. Invest in euros. 150 Examination, Lesson 5

3 6. Of the reasons listed below, which is the most important reason to invest internationally? A. The overall return on international investments exceeds the return on most domestic investments, thereby increasing total return. B. International investments may be riskier than domestic investments, but their diversifying effect can reduce the risk of the entire portfolio. C. International investments reduce total portfolio risk because returns on international investments typically have a lower standard deviation than domestic investments. D. Although domestic investments offer some growth opportunities, the mature domestic market lacks the number of growth opportunities in emerging economies. 7. If you lived in a nation that didn t use the Swiss currency for exchange and were invested in securities issued by the government of Switzerland, you might expect the value of your investment to rise if A. you hedged your investment with currency futures. B. the value of the Euro dropped in relation to the Swiss franc. C. political uncertainty in France resulted in a decline in your domestic stock market. D. your domestic currency fell in relation to the Swiss franc. 8. Use Figure 22.4, on page 819, to answer the following question: How would you interpret observations in the lower-left quadrant? A. When one country s return fell below 20 percent, the S&P 500 return was slightly below zero. B. After a year that the S&P 500 yielded a return slightly below zero, the EAFE lost more than 20 percent. C. Roughly every 20 years, you should expect a negative relationship between EAFE returns and returns in the S&P 500. D. Lines AB and CD are nearly equidistant from the observation, exemplifying how diversification can benefit a portfolio. 9. The importance of market efficiency and its contribution to international investing is that A. obtaining information on which to base foreign investment information may be difficult. B. the rapid dissemination of new information and the intense competition among investors produces efficient U.S. financial markets. C. foreign firms with securities traded on U.S. exchanges meet SEC disclosure requirements. D. inefficiencies in international markets may present opportunities for excess returns. 10. You might expect a domestic currency devaluation if A. exports increase, resulting in a flood of foreign currency into the country. B. significant domestic productivity declines decrease the attractiveness of domestic investments. C. demand for domestic currency by foreign investors increases the supply of domestic currency. D. domestic equity market values rise on news of projected interest rate decreases. Examination, Lesson 5 151

4 11. The cash budget is critical to financial planning because it A. enumerates receipts and disbursements necessary to project asset allocation. B. aids the investor when deciding to purchase small cap stocks. C. helps estimate social security payments. D. is the best means for establishing one s financial position. 12. Which of the following should be part of a balance sheet? A. Bank deposits, salary, and royalties B. IRA distributions, insurance, and maintenance C. Pension, money market funds, and Keogh accounts D. Certificates of deposit, cash value of life insurance, and real estate 13. Before investing, it s essential that the investor first A. determine his or her net worth. B. thoroughly research and hire a professional planner. C. construct a financial plan. D. define his or her goal. 14. If a U.S. investor buys the stock of a corporation in Mexico, the investor will certainly sustain a loss if the stock price A. falls and the value of the peso rises. B. rises and the value of the peso rises. C. falls and the value of the peso falls. D. rises and the value of the dollar rises. 15. When an investor buys an ETF, he or she A. knows the return will be based on the movement of dollar cost of the currency purchased. B. is sure of little fluctuation in the value of his or her currency. C. physically holds the currency purchased. D. counts on impure play of one currency s value versus another s. 16. A 30-year-old with a portfolio of $50,000 with projected earnings of five percent per year can expect the portfolio to be worth at age 60. A. $216, C. $132, B. $160, D. $108, The single most influential variable in determining investment returns is A. heavy reliance upon index mutual funds. B. selection of a fee-only investment advisor experienced in asset allocation. C. selection of low-cost, high-performing mutual funds. D. asset allocation decisions driven by investment policy. 152 Examination, Lesson 5

5 18. What is the most likely explanation for discrepancies between targeted asset allocations and current asset allocations if the portfolio s allocations matched the target one year ago and no money was added to or subtracted from the portfolio? A. Excessive turnover adds costs to the portfolio that put downward pressure on asset values. B. The investment policy may have assigned an over-weight to equity investments. C. Some asset class values rise and fall faster than others, leading to an imbalance. D. The portfolio performed much better than expected when targeted asset allocations were established. 19. The real benefit of constructing a cash budget for investors is to A. ensure that spending doesn t exceed income. B. identify sources of cash flow for investments. C. aid balance sheet construction. D. identify net cash flow for determination of net worth. 20. A pro forma financial statement identifies A. what is owed and what is owned. B. balance sheet and cash budget data. C. one s future or projected financial position. D. what the investor s present-day estate looks like. Examination, Lesson 5 153