Chapter 21 - Portfolio Management
Chapter 21 - Portfolio Management
Chapter 21 - Portfolio Management
A)
B)
C)
D)
Ans:
A)
B)
C)
D)
Ans:
3.A major difference between individual and institutional investors is their very different:
approaches to market analysis.
evaluations of return.
time horizons.
types of securities held in their portfolios.
C
A)
B)
C)
D)
Ans:
A)
B)
C)
D)
Ans:
8.Which of the following is NOT one of the phases of the life-cycle theory of asset
allocation?
A)
Accumulation phase
B)
Consolidation phase
C)
Taxation phase
D)
Gifting phase
Ans:
C
9.Investors can normally afford to assume larger risks in the ____ phase of the life-cycle.
A)
accumulation
B)
consolidation
C)
spending
D)
gifting
Ans:
A
10.Which of the following is NOT among the usual constraints and preferences considered
when formulating an investment policy?
A)
Gifting requirements
B)
Liquidity needs
C)
Tax considerations
D)
Time horizon
Ans:
A
11.Living expenses are covered from accumulated assets rather than from earned income in
the __________ phase of the life cycle.
A)
accumulation
B)
consolidation
C)
spending
D)
gifting
Ans:
C
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12.Which of the following statements regarding inflation and investing are true?
A)
Futures are the best hedge against inflation.
B)
Inflation is not a problem if you follow a buy and hold strategy.
C)
Common stock is not always an inflationary hedge.
D)
All of the above statements are true.
Ans:
C
13._____ governs employer-sponsored retirement plans.:
A)
Investors Advisors Act.
B)
Investment Company Act.
C)
Security Investors Protection Act.
D)
Employment Retirement Income Security Act.
Ans:
D
14.One aspect of the tax considerations in asset allocation is that
A)
capital gains are often taxed at a higher rate than income.
B)
taxes on capital gains are deferred until the gain is realized.
C)
investors are exempt from taxes on capital gains once they reach age 65.
D)
current income is seldom a significant consideration for an investor in the spending
phase of the life cycle.
Ans:
B
15.__________ is the most important investment decision because it determines the riskreturn characteristics of the portfolio.
A)
Hedging
B)
Market timing
C)
Performance measurement
D)
Asset allocation
Ans:
D
16.Which of the following is NOT a major consideration in the asset allocation process?
A)
Return requirements
B)
Risk tolerance
C)
Ease of monitoring progress
D)
Time horizon
Ans:
C
17.The life-cycle theory of asset allocation proposes that as investors progress through life,
their
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A)
B)
C)
D)
Ans:
18.An aggressive asset allocation would contain larger proportions of __________ than a
conservative allocation.
A)
cash and bonds
B)
bonds and large-cap stocks
C)
small-cap and international stocks
D)
bonds
Ans:
C
19.Conservative retirees likely have ____ than they did early in their careers.
A)
more small-cap stocks
B)
more international stocks
C)
fewer bonds
D)
more bonds
Ans:
D
20.A model for optimizing the selection of securities is the ______ model.
A)
Miller-Orr
B)
Black-Scholes
C)
Markowitz
D)
Gordon
Ans:
C
21.The Markowitz model identifies the efficient set of portfolios, which offers the
highest return for any given level of risk or the lowest risk for any given level of
return.
B)
least-risk portfolio for a conservative, middle-aged investor.
C)
long-run approach to wealth accumulation for a young investor.
D)
risk-free alternative for risk-averse investors.
Ans:
A
A)
22.A market timing approach that increases the proportion of funds in stocks when the stock
market is expected to be rising, and increases cash when the stock market is expected to
be falling is a:
A)
strategic asset allocation.
B)
tactical asset allocation.
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C)
D)
Ans:
portfolio optimization.
liquidity expectation timing.
B
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Ans:
28.Many institutional investors do not have to consider taxes, which are generally an
important consideration for individual investors.
A)
True
B)
False
Ans:
A
29.Monitoring and revision are not a part of the Maginn and Tuttle portfolio management
process.
A)
True
B)
False
Ans:
B
30.The Prudent Man Rule, which applies to fiduciaries, is a relatively new concept in
investment management.
A)
True
B)
False
Ans:
B
31.Conservative investors are more likely to have international stocks than aggressive
investors.
A)
True
B)
False
Ans:
B
32.In order to arrive at an investment policy, it is necessary to determine whether the market
is headed for a bull or bear market.
A)
True
B)
False
Ans:
B
33.Pension funds are governed by the prudent man rule since specific pension fund
legislation has never passed.
A)
True
B)
False
Ans:
B
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34.The geometric mean for the S&P 500 for the period 1920-2005 was between 15 and 20
percent.
A)
True
B)
False
Ans:
B
35.The cumulative gain on the S&P 500 Index for 1995 and 1996 was almost 70 percent.
A)
True
B)
False
Ans:
A
36.The risk of owning common stock decreases over time.
A)
True
B)
False
Ans:
B
37.Investors in the early stages of their careers would likely hold more large-cap stocks than
cash and bonds combined.
A)
True
B)
False
Ans:
A
38.An efficient set of portfolios offers maximum risk for any level of return.
A)
True
B)
False
Ans:
B
39.The consolidation phase of the life cycle begins when the investor reaches retirement.
A)
True
B)
False
Ans:
B
40.Under the life cycle approach, the lowest risk and lowest return should come during the
spending and gifting stages.
A)
True
B)
False
Ans:
A
41.The spending phase of the life cycle is avoided by investors who follow the prudent man
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rule.
A)
B)
Ans:
True
False
B
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preferred mix is chosen, based on the outcomes. Tactical asset allocation involves
adjusting the proportions of assets among categories as expectations about the
market change. For example, if a bull market is expected, the portfolio would be
adjusted to have more stocks, fewer bonds, and less cash.
48.Explain the life-cycle theory of portfolio policies.
Ans:
There are 4 different phases of investing and each has different characteristics and
different investing strategies.
Accumulation Phase: Net worth is small but investors have a long time to invest
and can afford to take large risks.
Consolidation Phase: Income often exceeds expenses and an investment
portfolio can be accumulated. A moderate risk-return tradeoff is expected.
Spending Phase: Living expenses are often covered from accumulated assets
rather than from earned income. Safety is more important now.
Gifting Phase: The purpose of investment changes as investors pass on
accumulated wealth. Low risk is still evident.
49.Mr. Baker, a single person in early retirement, owns a house, a well-used car, and
minimal life insurance. He has pension assets of about half a million dollars. He wants it
all in tax-exempt municipal bonds so that I won't lose any money, and I won't have to
pay taxes. Considering the life-cycle theory of asset allocation, would you suggest any
alternatives to this client?
Ans:
Considering the client's need for income, bonds are a good choice, but the entire
pension plan need not be in municipals. Munis are not necessarily safe. His assets
suggest that he is not in a high tax bracket, which does not indicate the need for tax
sheltering all of his income. The after-tax yield on alternative, taxable bonds
should be compared to the tax exempts. Since he may have a long time to live, he
needs some protection from inflation. Allocating some of the portfolio to large-cap
stocks would provide some inflation protection without subjecting all of the assets
to stock market fluctuations. Some cash is needed for liquidity, and a small
allocation to more risky stocks might sweeten his later years
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