IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 951:

  The benefits of diversification decline to near zero when the number of securities held increases beyond.

  A. 4

  B. 6

  C. 10

  D. 40

  Correct Answer: D

  The benefits of diversification become extremely small when more than 20 to 30 different securities are held. Moreover, commissions and other transaction costs increase with greater diversification.

• Question 952:

  A measure that describes the risk of an investment project relative to other investments in general is the

  A. Coefficient of variation

  B. Beta coefficient

  C. Standard deviation

  D. Expected return

  Correct Answer: B

  The required rate of return on equity capital in the capital asset pricing model is the risk- free rate (determined by government securities), plus the product of the market risk premium times the beta coefficient (beta measure the firm's risk). The market risk premium is the amount above the risk-free rate that will induce investment in the market. The beta coefficient of an individual stock is the correlation between the volatility (price variation) of the stock market and that of the price of the individual stock. For example, if an individual stock goes up 15% and the market only 10%, beta is 1.5.

• Question 953:

  If two projects are completely and positively linearly dependent (or positively related), the measure of correlation between them is

  A. 0

  B. + 0.5

  C. +1

  D. 1

  Correct Answer: C

  The measure of correlation when two projects are linearly dependent in a positive way will be +1.0.

• Question 954:

  The chief financial officer of Smith Glass, Inc. follows the policy of matching the maturity of assets with the maturity of financing. The implications of this policy include all of the following, expect that

  A. The seasonal expansion of cash, receivables, and inventory should be financed by short-term debt, such as vendor payables and bank debt.

  B. The minimum level of cash, receivables, and inventory required to stay in business can be considered permanent and financed with long-term debt or equity.

  C. Cash, receivables, and inventory should be financed with long-term debt or equity

  D. long-term assets, like plant and equipment, should be financed with long-term debt or equity.

  Correct Answer: C

  Arranging a portfolio so that the maturity of funds will coincide with the need for funds (called maturity matching) will maximize the average return on the portfolio and provide increased flexibility. Supporting short-term assets, such as cash and receivables, with long-term financing is risk and counterproductive.

• Question 955:

  An optimal portfolio of investments is

  A. Efficient because it offers the highest expected return.

  B. Any portfolio chosen from the efficient set of portfolios

  C. Any portfolio chosen from the feasible set of portfolios

  D. Tangent to the investor's highest indifference curve.

  Correct Answer: D

  An investor wants to maximize expected return and minimize risk when choosing a portfolio. A feasible portfolio that offers the highest expected return for a given risk or the least risk for a given expected return is an efficient portfolio. A portfolio that is selected from the efficient set of portfolios because it is tangent to the investor's highest indifference curve is the optimal portfolio.

• Question 956:

  Which of the following specifically measures the volatility of returns together with their correlation with the returns of other securities?

  A. Variance

  B. Standard deviation

  C. Coefficient of variation

  D. Covariance

  Correct Answer: D

• Question 957:

  An indifference curve represents combinations of portfolios having equal utility to the investor. Given that risk and returns are plotted on the horizontal and vertical axes, respectively, and that the investor is risk averse, the curve has

  A. An increasingly steeper slope if the investor is less risk averse.

  B. A decreasingly negative slope if the investor's utility increases.

  C. An increasingly positive slope

  D. A decreasingly positive slope.

  Correct Answer: C

  An indifference curve represents combinations of portfolios having equal utility to the investor. Given that risk and returns are plotted on the horizontal and vertical axes, respectively, and that the investor is risk averse, the curve has an increasingly positive slope. As risk increase, the additional required return per unit of additional risk also increases. The steeper the slop of an indifference curve, the more risk averse an investor is. The higher the curve, the greater is the investor's level of utility.

• Question 958:

  The return on tow stocks can be correlated in values expect those that are A. Positive

  B. Negative

  C. Neutral

  D. Skewed

  Correct Answer: D

  The correlation(r) measures the degree to which any two variables are related. It ranges from -1.0 to 1.0. Perfect positive correlation (1.0) means that the two variables always move together. Perfect negative correlation (-1.0) means that the two variables always move inversely to one another. A neutral correlation, or no correlation, is 0.0 Skewed is a nonsense concept in this context.

• Question 959:

  A U.S. company currently has domestic operations only. It is considering an equal-size investment in either Canada or Britain. The data on expected rate of return and the risk associated with each of these proposed investments are given below.

  

  The mean return on the company's current, domestic only, business is 20% with a standard deviation of 15%. Using the above data and the correlation coefficients, the company calculated the following portfolio risk and return (based on a ratio of 50% U.S. domestic operations and 50% international operations).

  

  The company plans to select the optimal combination of countries based on risk and return for the domestic and international investments taken together. Because the company is new to the international business environment, it is relatively risk averse. Based on the above data, which one of the following alternatives provides the best risk- adjusted return to the firm?

  A. Undertake the British investment

  B. Undertake the Canadian investment

  C. Do not undertake either investment.

  D. Unable to determine based on data given.

  Correct Answer: A

  A risk-averse company will select the investment with the lesser risk. Thus, by choosing to invest in Britain, the overall rate of return will increase from 20% to 21%, and risk, based on the standard deviation, will decline from 15% to 3%. This gives a better return per unit of risk as compared to the Canadian investment.

• Question 960:

  A feasible portfolio that offers the highest expected return for a given risk or the least risk for a given expected return is a (n)

  A. Optimal portfolio

  B. Desirable portfolio

  C. Efficient portfolio D. Effective portfolio

  Correct Answer: C

  A feasible portfolio that offers the highest expected return for a given risk or the least risk for a given expected return is called an efficient portfolio.