Question

To preserve capital in a declining share market, a portfolio manager should: a. Shift funds from cash markets into share markets. b. Buy call options on the share index. c. Sell put options on the share index. d. Buy share index futures. e. Sell share index futures.

Which of the following is a FALSE statement? a. The S&P500 is a popular benchmark for evaluating portfolio performance in the US. b. Dollar-weighted returns are appropriate for portfolio managers. c. Superior performance can result from superior skill in market timing. d. The higher the R2, the less the diversifiable risk. e. An average return of 1% over a period is not necessarily poor performance.

Modified duration is higher than Macaulay’s duration except for: a. zero-coupon bonds. b. discount bonds. c. premium bonds. d. bonds selling at par value. e. none of the above.

Which of the following is INCORRECT? a. Common stock represents ownership interest of corporations. b. Money market securities are highly liquid, low-risk short-term instruments. c. The buyer of an option has limited liability. d. Debt rated BBB and below is regarded as speculative. e. A common share is a capital market security.

Answer 1

To preserve capital in a declining share market, a portfolio manager should:

The correct answer is option e. Sell share index futures.

Short index future will lead to gains in a declining share market. Prices will fall down and index will become cheaper in future. A short position will result into profits.

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The FALSE statement:

The correct answer is option b. Dollar-weighted returns are appropriate for portfolio managers.

Time weighted returns are appropriate and commonly used performance measures for portfolio managers.

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Modified duration = Macaulay duration / (1 + yield)

Hence, modified duration is always smaller than modified duration.

Hence, the correct answer is option e. none of the above.

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INCORRECT statement:

The correct answer is option c. The buyer of an option has limited liability.

The buyer of an option has right but no obligation and hence no liability.