3. X. Multiple asset performance I. Allocates a portion of the initial
portfolio to active management with the
balance being immunized.
Y. Contingent immunization II. Option valuation-based approach to
fixed-income asset allocation.
III. Objective is to achieve a portfolio
return equal to the return of the best
performing of the various fixed income
asset classes held in the portfolio, less a
predetermined strategy cost.
Course 6: Spring 2003 - 14 - GO ON TO NEXT PAGE
4. X. Arbitrage Pricing Theory I. Assumes an unobservable market
portfolio.
Y. Capital Asset Pricing Model II. Provides an unequivocal statement on
the expected return-beta relationship
for all assets.
III. Highlights the crucial distinction
between diversifiable and
nondiversifiable risk.
5. X. Putable Bond I. Positive convexity
Y. Callable Bond II. As interest rates decrease, the bond
duration decreases
III. Negative convexity
6. X. Markowitz Portfolio Selection Model I. Separates risk into macro and micro
components.
Y. Index Model II. Requires a large number of estimates.
III. Allows for specialization of effort in
security analysis.
Course 6: Spring 2003 - 15 - GO ON TO NEXT PAGE
3-8. Each of questions 3 through 8 consists of two lists. In the list at the left are two items, lettered
X and Y. In the list at the right are three items, numbered I, II, and III. ONE of the lettered
items is related in some way to EXACTLY TWO of the numbered items. Indicate the related
items using the following answer code:
Lettered Item
Is Related to Numbered Items
(A)
X
I and II only
(B)
X
II and III only
(C)
Y
I and II only
(D)
Y
I and III only
(E)
The correct answer is not given by (A), (B), (C) or (D).
7. X. Insured asset allocation I. Assumes the investor’s risk tolerance is
unaffected by changes in the investor’s
circumstance.
Y. Tactical asset allocation II. Assumes expected returns, variances
and correlations remain the same over
time.
III. Goal is to take advantage of perceived
inefficiencies in capital markets.
8. X. Limit-buy order I. Buy stock when the price falls below a
given price limit.
Y. Stop-buy order II. Often accompanies short sales.
III. Buy stock when the price rises above a
given price limit.
Course 6: Spring 2003 - 16 - GO ON TO NEXT PAGE
USE THIS PAGE FOR YOUR SCRATCH WORK
Course 6: Spring 2003 - 17 - GO ON TO NEXT PAGE
9. You are given the following with respect to two portfolios:
Portfolio A Portfolio B
Expected Return 10% 8%
Variance 2% 3%
An investor has all his funds in Portfolio A. His expected utility is the same as for a certain
return of 6%.
Calculate the equivalent certain return for Portfolio B for this investor.
(A) –0.50%
(B) 2.00%
(C) 3.00%
(D) 3.67%
(E) 6.50%
Course 6: Spring 2003 - 18 - GO ON TO NEXT PAGE
USE THIS PAGE FOR YOUR SCRATCH WORK
Course 6: Spring 2003 - 19 - GO ON TO NEXT PAGE
10. You are given the following with respect to a treasury bill:
•price on June 30, 2003: 9,800
•par value: 10,000
•maturity date: December 31, 2003
Calculate the difference between the effective annual rate and the bank discount yield as of June
30, 2003.
(A) 0.12%
(B) 0.13%
(C) 0.16%
(D) 0.17%
(E) 0.21%
Course 6: Spring 2003 - 20 - GO ON TO NEXT PAGE
USE THIS PAGE FOR YOUR SCRATCH WORK
Course 6: Spring 2003 - 21 - GO ON TO NEXT PAGE
11-15. Questions 11 through 15 consist of an assertion in the left-hand column and a reason in the
right-hand column. Code your answer to each question by blackening space:
(A) If both the assertion and the reason are true statements, and the reason is a correct
explanation of the assertion.
(B) If both the assertion and the reason are true statements, but the reason is NOT a
correct explanation of the assertion.
(C) If the assertion is a true statement, but the reason is a false statement.
(D) If the assertion is a false statement, but the reason is a true statement.
(E) If both the assertion and the reason are false statements.

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