Portfolio Management - Portfolio Management Section 1

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21. An analyst observes that stock markets usually demonstrate return distributions concentrated to the right with a higher frequency of positive deviation from the mean. This feature is most likely known as:

  • Option : A
  • Explanation : Stock returns are usually negatively skewed because there is a higher frequency of positive deviations from the mean and most of the distribution is concentrated to the right.
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22. The annualized return for an investor who has achieved a return of 18% over an 18-month period is closest to:

  • Option : A
  • Explanation : Annualized return is calculated as: (1 + 0.18)12/18 – 1 = 0.1167 = 11.67%.
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23. An analyst observes that the historic geometric return is 10% for equities, 2% for treasury bills and 3% for inflation. The real rate of return and risk premiums for equities are closest to:

  • Option : C
  • Explanation : The real of return and risk premium are calculated as: Real rate of return = [(1 + 0.1) / (1 + 0.03)] - 1 = 6.8% Risk Premium = [(1 + 0.068) / (1 + 0.02)] - 1 = 4.7%
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24. A set increase in risk, when one moves from left to right along an efficient frontier, will most likely lead to:

  • Option : C
  • Explanation : As one moves from left to right along an efficient frontier, the increase in return with every unit increase in risk keeps decreasing because the slope of the efficient frontier continues to decrease.
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