Portfolio Management- An Overview, Quizzes of Financial Economics

Download Portfolio Management- An Overview and more Quizzes Financial Economics in PDF only on Docsity! Question #1 of 26 Question ID: 1379726 In a defined contribution pension plan, investment risk is borne by the: A) employee. B) plan sponsor. C) fund manager. Explanation Defined contribution pension plans require the plan sponsor (the employer) to make payments to the employees' retirement accounts throughout the duration of their employment. Once payments are made by the sponsor, the sponsor's obligation is fulfilled and the investment risk is borne by the employees. For Further Reference: (Study Session 17, Module 48.1, LOS 48.d) CFA® Program Curriculum, Volume 5, page 419 Question #2 of 26 Question ID: 1379732 Which of the following pooled investments is least likely to employ large amounts of leverage? A) Venture capital fund. B) Global macro hedge fund. C) Private equity buyout fund. Explanation Hedge funds and buyout firms typically employ high leverage to acquire assets. Venture capital typically involves an equity interest. (Study Session 17, Module 48.2, LOS 48.f) Question #3 of 26 Question ID: 1379729 A pooled investment with a share price significantly different from its net asset value (NAV) per share is most likely a(n): A) closed-end fund. B) exchange-traded fund. C) open-end fund. Explanation Closed-end funds' share prices can differ significantly from their NAVs. Open-end fund shares can be purchased and redeemed at their NAVs. Market forces keep exchange- traded fund share prices close to their NAVs because arbitrageurs can profit by trading when there are differences. (Study Session 17, Module 48.2, LOS 48.f) Question #4 of 26 Question ID: 1379731 A mutual fund that invests in short-term debt securities and maintains a net asset value of $1.00 per share is best described as a: A) balanced fund. B) bond mutual fund. C) money market fund. Explanation Money market funds invest primarily in short-term debt securities and are managed to maintain a constant net asset value, typically one unit of currency per share. A bond mutual fund typically invests in longer-maturity securities than a money market fund. A balanced fund invests in both debt and equity securities. (Study Session 17, Module 48.2, LOS 48.f) Question #5 of 26 Question ID: 1379713 Which of the following would be assessed first in a top-down valuation approach? A) Industry return on equity (ROE). B) Industry risks. In a defined benefit pension plan, a periodic payment, typically based on the employee's salary, is promised to the employee upon retirement and the employer contributes to an investment trust that generates the principal growth and income to meet the pension obligation. The employees do not direct the investments in their accounts as they do in a defined contribution plan. Pension expense for a defined benefit plan has several components, including service cost, prior service cost, and interest cost, and depends on actuarial assumptions and the expected rate of return on plan assets. (Study Session 17, Module 48.1, LOS 48.d) Question #10 of 26 Question ID: 1379727 MAL Investments is an asset management company that consists of three subsidiaries: one that focuses on mid-cap value stocks, one that focuses on alternative assets, and one that focuses on long-term emerging market sovereign debt. MAL is most accurately described as a: A) full-service asset manager. B) multi-boutique rm. C) specialist asset manager. Explanation A multi-boutique firm is a holding company that includes a number of different specialist asset managers. (Study Session 17, Module 48.2, LOS 48.e) Question #11 of 26 Question ID: 1379716 The top-down analysis approach is most likely to be employed in which step of the portfolio management process? A) The execution step. B) The planning step. C) The feedback step. Explanation Top-down analysis would be used to select securities in the execution step. (Study Session 17, Module 48.1, LOS 48.b) Question #12 of 26 Question ID: 1379723 In a defined contribution pension plan, investment risk is borne by the: A) employee. B) employer. C) plan manager. Explanation In a defined contribution plan, the employee makes the investment decisions and assumes the investment risk. (Study Session 17, Module 48.1, LOS 48.d) Question #13 of 26 Question ID: 1379734 Open-end mutual funds differ from closed-end funds in that: A) closed-end funds require active management, while open-end funds do not. B) open-end funds stand ready to redeem their shares, while closed-end funds do not. C) open-end funds issue shares that are then traded in secondary markets, while closed-end funds do not. Explanation Open-end funds redeem existing shares or issue new shares in accordance with investor demand. Closed-end fund shares are fixed in number and trade on exchanges as though they were common stock. For Further Reference: (Study Session 17, Module 48.2, LOS 48.f) CFA® Program Curriculum, Volume 5, page 425 Question #14 of 26 Question ID: 1379717 Identifying a benchmark for a client portfolio is most likely to be part of the: A) execution step. B) feedback step. C) planning step. Explanation Identification of the client's benchmark would be established in the planning step, to allow assessment of performance in the feedback step. (Study Session 17, Module 48.1, LOS 48.b) Question #15 of 26 Question ID: 1379718 The execution step in the portfolio management process is most likely to include: A) asset allocation and security analysis. B) performance measurement and portfolio rebalancing. C) preparation of an investment policy statement. Explanation The three major steps in the portfolio management process are planning, execution, and feedback. Asset allocation and security analysis are components of the execution step, as is portfolio construction. Preparation of an investment policy statement is a component of the planning step. Portfolio monitoring and rebalancing, as well as performance measurement and reporting, are part of the feedback step. (Study Session 17, Module 48.1, LOS 48.b) Question #16 of 26 Question ID: 1379719 High risk tolerance, a long investment horizon, and low liquidity needs are most likely to characterize the investment needs of a(n): A) bank. Foundations and life insurance companies typically have long investment horizons. Property and casualty insurance companies typically have shorter investment horizons than life insurance companies because claims against their policies occur sooner on average. (Study Session 17, Module 48.1, LOS 48.c) Question #21 of 26 Question ID: 1379714 In the top-down approach to asset allocation, industry analysis should be conducted before company analysis because: A) most valuation models recommend the use of industry-wide average required returns, rather than individual returns. B) the goal of the top-down approach is to identify those companies in non-cyclical industries with the lowest P/E ratios. C) an industry's prospects within the global business environment are a major determinant of how well individual rms in the industry perform. Explanation In general, an industry's prospects within the global business environment determine how well or poorly individual firms in the industry do. Thus, industry analysis should precede company analysis. The goal is to find the best companies in the most promising industries; even the best company in a weak industry is not likely to perform well. (Study Session 17, Module 48.1, LOS 48.b) Question #22 of 26 Question ID: 1379728 Which of the following statements about active and passive asset management is most accurate? A) Active management has been gaining market share over time versus passive management. B) Active management may use fundamental analysis, technical analysis, or a “smart beta” approach to outperform a chosen benchmark. C) Passive management’s share of industry revenues is smaller than its share of assets under management. Explanation Because fees for passive management are lower than fees for active management, passive management represents a smaller share of industry revenues than assets under management. Passive management has been gaining market share over time versus active management. Smart beta is a passive management strategy that focuses on a specific market risk factor. (Study Session 17, Module 48.2, LOS 48.e) Question #23 of 26 Question ID: 1379733 Which of the following pooled investment shares is least likely to trade at a price different from its NAV? A) Open-end mutual fund shares. B) Closed-end mutual fund shares. C) Exchange-traded fund shares. Explanation Shares of open-end mutual funds trade at NAV. The others may deviate from NAV. For Further Reference: (Study Session 17, Module 48.2, LOS 48.f) CFA® Program Curriculum, Volume 5, page 425 Question #24 of 26 Question ID: 1379711 The portfolio approach to investing is best described as evaluating each potential investment based on its: A) fundamentals such as the nancial performance of the security issuer. B) potential to generate excess return for the investor. C) contribution to the investor’s overall risk and return. Explanation The portfolio approach to investing refers to evaluating individual investments based on their contribution to the overall risk and return of the investor's portfolio. Evaluating potential investments on a standalone basis, such as by analyzing their fundamentals or their potential to generate excess return, does not describe the portfolio approach to investing. (Study Session 17, Module 48.1, LOS 48.a) Question #25 of 26 Question ID: 1379725 Promised payments to pension beneficiaries are a responsibility of the plan sponsor in: A) a dened contribution plan only. B) both a dened benet plan and a dened contribution plan. C) a dened benet plan only. Explanation In a defined benefit plan the promised payments to beneficiaries are a responsibility of the firm sponsoring the plan. In a defined contribution plan no fixed payments are promised to beneficiaries. (Study Session 17, Module 48.1, LOS 48.d) Question #26 of 26 Question ID: 1379709 In the Markowitz framework, an investor should most appropriately evaluate a potential investment based on its: A) eect on portfolio risk and return. B) expected return. C) intrinsic value compared to market value. Explanation Modern portfolio theory concludes that an investor should evaluate potential investments from a portfolio perspective and consider how the investment will affect the risk and return characteristics of an investor's portfolio as a whole. (Study Session 17, Module 48.1, LOS 48.a)