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Test July 2018, questions and answers
Portfolio Theory & Management III (The University of Adelaide)
StuDocu is not sponsored or endorsed by any college or university
Test July 2018, questions and answers
Portfolio Theory & Management III (The University of Adelaide)
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Sample Test
Question 1
Using historical data, the Value at Risk (VaR) of a portfolio:
a) is the probability of a portfolio return above a certain level with 95% confidence over a period of time. This
statement should have read “portfolio return above a certain level with 95% confidence over a period of time”
for it to be perfectly co
ect. Else (e) none of the above.
) is the standard deviation (square root of variance) of portfolio returns over a period of time.
c) is the average loss of a portfolio over a period.
d) is the probability of getting portfolio returns below equity market returns over a period of time.
e) None of the above
Question 2
A spending rule that is ___________ of last year’s assets value and ___________ of last year’s spending level
will ensure stable spending over time but will not provide a match between spending and investments (asset
value).
a) High proportion; Low proportion.
) Low proportion; High proportion.
c) Low proportion; Low proportion.
d) High proportion; High proportion.
e) None of the above
Question 3
The following asset allocation (Cash: Bonds: Domestic Equities: International Equities) is an aggressive (growth)
asset allocation:
a) 10:40:40:10
) 20:30:40:10
c) 10:30:30:30
d) 10:50:10:30
e) None of the above
Question 4
An IPS also details the selection criterion of Investment Vehicles. Which of the following is not relevant to
identify suitable Investment Vehicles?
a) For Cash, select passive fund with at least 5 years of operations and at least $2.5billion in AUM.
) For Bonds, select 2 active funds that have performed 0.5% (after costs) above the relevant benchmark over
the last 3 years.
c) For Domestic Equities, select 2 funds that have different active investment styles and have shown (after
costs) returns higher than the benchmark over the last 3 years.
d) For International Equities, select a passive fund that has provided higher returns (before costs) than the
enchmark over the last 3 years. Passive funds do not try to achieve above BM returns
e) All of the above are co
ect in identifying suitable Investment Vehicles
Question 5
One of the following does not form part of an investment objective:
a) Preservation of capital in real terms.
) Maximum loss of 10% in any given 12 month period.
c) Returns of the portfolio to cover 10% of operating costs.
d) Allocate a maximum of 5% in Emerging markets.
e) All of the above are part of an investment objective
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Question 6
Consider an investor who requires a return of 10% per annum and has liquidity needs of 6% per annum to fund
living expenses. If the investment portfolio’s total returns are11% per annum, of which cash distribution (cash
yield) are 3% per annum, which of the following action is most appropriate?
a) Investor’s liquidity needs of 6% are made up by 3% cash distribution and the remaining 3% by short term
o
owing.
) Investor’s liquidity needs of 6% are made up by the portfolio being re-allocated to lower risk, but more liquid,
assets so that the new portfolio provides 7% returns with 6% distribution.
c) Investor’s liquidity needs of 6% are made up by using up the 3% of cash distribution and the rest made up
selling capital gains (assets) worth 3% each year.
d) Actions A and B only.
e) Actions B and C only.
Question 7
A portfolio (e.g an endowment fund) usually requires splitting allocation for each asset class amongst several
single-asset class fund managers, as investing with more than one fund manager allows for:
a) Diversification of fund manager’s risk.
) Multiple focused exposures within each asset class.
c) Multiple investment strategies (active and passive) within the same asset class.
d) All of the above.
e) None of the above
Question 8
Consider that the ASX 200 securities were used to create an efficient frontier using 20 years of historical annual
data. The 200 stocks were then plotted on the Security Market Line (SML) to identify all mispriced securities. An
active equity fund consisting of the 200 stocks was then constructed. Identify the statement that is inco
ect
egarding this active equity fund:
a) The fund attempts to provide higher risk-adjusted returns against the ASX200.
) The fund charges higher fees than a passive ASX200 fund.
c) The fund ca
ies higher systematic risk than the ASX200.
d) The fund ca
ies higher total risk than the ASX200.
e) None of the above
Question 9
Ranges are required in an asset allocation so that:
a) The portfolio remains well-diversified amongst the selected asset classes.
) Portfolio manager is able to take advantage of market movements.
c) A clear trigger point is available to rebalance the portfolio.
d) All of the above.
e) None of the above
Question XXXXXXXXXX
Use the details for the UBS Australian Bond that you used in the second tutorial to answer these questions.
Question 10
What is the minimum investment and the management fee for this fund?
a) $20,000 and 0.05%.
) $20,000 and 0.025%.
c) 20,000 and 0.45%.
d) $10,000 and 0.45%.
e) $10,000 and 0.025%
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Question 11
The benchmark used by this fund is:
a) UBS Australian Fund Index
) Bloomberg AusBond Composite 0+Years Index
c) ASX 200 Index
d) ASX 300 Index
e) No benchmark is specified
Question 12
The fund strategy (Active or Passive) is:
a) Active: because the fund’s investment objective says it is an active fund
) Passive: because it does not outperform the benchmark by a large margin
c) Active: because the fund’s modified duration and its yield to maturity is different from the benchmark
d) Not enough details are provided in the factsheet
e) A and C only
Question 13
Risk for an institutional investor depends primarily on:
a) The willingness to take risk
) The ability to take risk
c) Both. If one is higher than the other, counselling of the investor is required
d) Nether. Institutional investors only care about returns
e) Depends on the risk tolerance of the portfolio manager
Question 14-17 refer to JAKE’s case as discussed in your tutorial:
Question 14
Which of the statements is co
ect regarding BU’s endowment fund:
a) The endowment fund is cu
ently overfunded as 3.5% of the assets are more than sufficient to cover 10% of
the annual expense budget
) The endowment fund is cu
ently underfunded as 3.5% of the assets are insufficient to cover 10% of the
annual expense budget
c) The endowment fund is only required to provide 3.5% of the annual spending budget.
d) The fund is very large as it has $800m.
e) All of the above statements are inco
ect regarding the endowment fund
Question 15
The benchmark for the endowment fund is:
a) To ensuring the fund provides 10% of the annual expense budget
) A 60:40 equity:bond
c) Not mentioned explicitly but it will most likely be based on the policy weights.
d) CPI.
e) A 50:50 equal weighted portfolio
Question 16
A time line for Implementation is provided by the JAKE so that:
a) The cu
ent allocation can be moved to the suggested asset allocation
) It considers the liquidity of the assets that are being purchased and sold
c) Considers mispricing of the assets that are being purchased and sold.
d) All of the above.
e) A and B only
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Question 17
The implementation of the asset allocation requires JAKE to:
a) Invest all assets with passive fund managers
) Invest all assets with active fund managers
c) A mix of passive and active based on the size of allocation – higher allocation with active managers and
smaller allocation with passive managers.
d) A mix of passive and active based on the liquidity and efficiency of the assets – asset classes that are less
efficient are managed actively and asset classes that are more efficient managed passively.
e) No information was provided in the case
Question 18
To ensure that all the investment is invested in a portfolio of risky assets, the constraint that is necessary is:
a) The total weight must add to 1.
) Each asset weight is equal to or greater than 0.
c) Each asset weight is equal to or less than 1.
d) A required return of the portfolio of 10% is explicitly stated.
e) A VaR of -10% is explicitly stated.
Question 19
To ensure that a certain level of required return of 10% is achieved, the constraint that is necessary is:
a) The total weight must add to 1.
) Each asset weight is equal to or greater than 0.
c) Each asset weight is equal to or less than 1.
d) A required return of