FINC 412: Portfolio Management

Questions and Answers

What is the primary goal of adopting a portfolio approach to investing?

To evaluate individual securities in relation to their contribution to the investment characteristics of the whole portfolio

Which of the following is NOT a key principle of portfolio construction?

Evaluating individual securities in isolation

What is the primary purpose of an Investment Policy Statement (IPS)?

To outline the investment strategy for a portfolio

Which of the following is a key aspect of portfolio monitoring?

Rebalancing the portfolio to maintain the target asset allocation Signup and view all the answers

What is the primary role of asset allocation in portfolio construction?

To allocate assets across different asset classes Signup and view all the answers

Why is risk aversion an important consideration in portfolio selection?

Because it helps investors to manage their risk tolerance and achieve their investment objectives Signup and view all the answers

What is the primary purpose of calculating the correlation coefficient between two securities?

To assess the diversification benefits of combining two securities in a portfolio Signup and view all the answers

Which of the following is a key benefit of taking a portfolio approach to investing?

Reducing the overall risk of the portfolio Signup and view all the answers

What is the primary purpose of an Investment Policy Statement (IPS)?

To communicate the client's investment objectives and constraints to the portfolio manager Signup and view all the answers

During the Execution Stage of the portfolio management process, what is the primary focus of security analysis?

Selecting individual securities for the portfolio Signup and view all the answers

Why is it essential to have a clear understanding of the client's investment objectives and constraints during the Planning Stage?

To develop an effective Investment Policy Statement (IPS) Signup and view all the answers

What is the primary purpose of portfolio monitoring and rebalancing during the Feedback Stage?

To adjust the asset allocation to reflect changes in the client's investment objectives Signup and view all the answers

What is the ultimate goal of strategic asset allocation in the Execution Stage?

To achieve the client's investment objectives Signup and view all the answers

What is the purpose of performance measurement and reporting during the Feedback Stage?

To communicate the portfolio's performance to the client Signup and view all the answers

What is the role of an Investment Policy Statement (IPS) in the Planning Stage?

To communicate the client's investment objectives and constraints Signup and view all the answers

What is the primary focus of the Planning Stage in the portfolio management process?

Understanding the client's investment objectives and constraints Signup and view all the answers

What is the correlation coefficient of two perfectly negatively correlated series?

-1.0 Signup and view all the answers

What is the effect of combining two assets with a correlation coefficient of +1?

Eliminate no risk Signup and view all the answers

Which of the following statements is true about diversification?

It reduces the risk of a portfolio Signup and view all the answers

What is the benefit of combining assets with a correlation coefficient of less than +1?

Some risk reduction Signup and view all the answers

What happens to the overall risk of a portfolio when assets that are less than perfectly positively correlated are combined?

It decreases Signup and view all the answers

What is the primary objective of the portfolio management process?

To understand the client's investment goals, resources, circumstances, and constraints Signup and view all the answers

What is the benefit of combining assets with a correlation coefficient of less than 0?

More risk reduction Signup and view all the answers

What is the correlation coefficient of two perfectly positively correlated series?

+1.0 Signup and view all the answers

What is the purpose of calculating the average monthly rate of return for each stock?

To measure the performance of each stock Signup and view all the answers

What is the effect of combining two assets with a correlation coefficient of -1?

Eliminate all risk Signup and view all the answers

What is the correlation coefficient used to measure?

The relationship between the rates of return of two stocks Signup and view all the answers

What is the purpose of calculating the covariance of two returns series?

To measure the joint variability of the two returns series Signup and view all the answers

What is the primary goal of asset allocation?

To optimize the portfolio's return for a given level of risk Signup and view all the answers

What is the purpose of an investment policy statement?

To establish investment guidelines and objectives Signup and view all the answers

What is the purpose of portfolio monitoring?

To evaluate the performance of the portfolio Signup and view all the answers

What is the purpose of calculating the standard deviation of returns for each stock?

To measure the volatility of each stock Signup and view all the answers

What is a key objective during portfolio construction?

To achieve the benefits of diversification Signup and view all the answers

What happens when security and asset weightings have drifted from the intended levels?

Rebalancing may be required Signup and view all the answers

What is the purpose of performance evaluation and reporting?

All of the above Signup and view all the answers

What is the role of security analysts in portfolio construction?

To identify attractive investments in particular market sectors Signup and view all the answers

What is included in the Investment Policy Statement (IPS)?

All of the above Signup and view all the answers

What happens during the feedback step of the portfolio management process?

The portfolio is monitored and rebalanced Signup and view all the answers

Why is it important to assign policy weights to each eligible asset class?

To allocate assets effectively Signup and view all the answers

What is the role of the portfolio manager during portfolio construction?

To construct the portfolio Signup and view all the answers

Study Notes

Portfolio Management

A portfolio perspective on investing involves evaluating individual securities in relation to their contribution to the investment characteristics of the whole portfolio.
The portfolio approach considers what asset classes to invest in, what policy weights to assign to each eligible class, and what allocation ranges are allowed based on policy weights.

Key Concepts

Portfolio management process: a three-step process including planning, execution, and feedback.
Investment policy statement (IPS): a written document governing the process of constructing a portfolio to meet the client's investment objectives.
Asset allocation: the long-term mix of assets expected to meet the investor's objectives.
Security analysis: the process of identifying attractive investments in particular market sectors.
Diversification: combining assets with low or negative correlation to reduce risk.
Correlation coefficient: measures the degree of correlation between two series, ranging from -1 (perfectly negatively correlated) to +1 (perfectly positively correlated).

Portfolio Construction

The portfolio manager constructs the portfolio, considering the target asset allocation, security analysis, and the client's requirements as set out in the IPS.
The goal is to achieve the benefits of diversification.

Portfolio Monitoring and Rebalancing

The portfolio is monitored and reviewed regularly to ensure it remains aligned with the client's objectives.
Rebalancing is necessary when security and asset weightings have drifted from the intended levels due to market movements.

Performance Evaluation

The performance of the portfolio is evaluated, including assessing whether the client's objectives have been met.
The portfolio's performance is compared to any benchmark that has been set.

Risk and Return Objectives

Risk aversion: the tendency of investors to prefer less risky investments.
Risk and return objectives are developed for a client based on their individual needs and preferences.

Calculations and Measurements

Average monthly rate of return: calculated for each stock.
Standard deviation of returns: calculated for each stock.
Correlation coefficient: calculated between the rates of return of two stocks.
Covariance: calculated for the two returns series.

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FINC 412: Portfolio Management

Questions and Answers

What is the primary goal of adopting a portfolio approach to investing?

Which of the following is NOT a key principle of portfolio construction?

What is the primary purpose of an Investment Policy Statement (IPS)?

Which of the following is a key aspect of portfolio monitoring?

What is the primary role of asset allocation in portfolio construction?

Why is risk aversion an important consideration in portfolio selection?

What is the primary purpose of calculating the correlation coefficient between two securities?

Which of the following is a key benefit of taking a portfolio approach to investing?

What is the primary purpose of an Investment Policy Statement (IPS)?

During the Execution Stage of the portfolio management process, what is the primary focus of security analysis?

Why is it essential to have a clear understanding of the client's investment objectives and constraints during the Planning Stage?

What is the primary purpose of portfolio monitoring and rebalancing during the Feedback Stage?

What is the ultimate goal of strategic asset allocation in the Execution Stage?

What is the purpose of performance measurement and reporting during the Feedback Stage?

What is the role of an Investment Policy Statement (IPS) in the Planning Stage?

What is the primary focus of the Planning Stage in the portfolio management process?

What is the correlation coefficient of two perfectly negatively correlated series?

What is the effect of combining two assets with a correlation coefficient of +1?

Which of the following statements is true about diversification?

What is the benefit of combining assets with a correlation coefficient of less than +1?

What happens to the overall risk of a portfolio when assets that are less than perfectly positively correlated are combined?

What is the primary objective of the portfolio management process?

What is the benefit of combining assets with a correlation coefficient of less than 0?

What is the correlation coefficient of two perfectly positively correlated series?

What is the purpose of calculating the average monthly rate of return for each stock?

What is the effect of combining two assets with a correlation coefficient of -1?

What is the correlation coefficient used to measure?

What is the purpose of calculating the covariance of two returns series?

What is the primary goal of asset allocation?

What is the purpose of an investment policy statement?

What is the purpose of portfolio monitoring?

What is the purpose of calculating the standard deviation of returns for each stock?

What is a key objective during portfolio construction?

What happens when security and asset weightings have drifted from the intended levels?

What is the purpose of performance evaluation and reporting?

What is the role of security analysts in portfolio construction?

What is included in the Investment Policy Statement (IPS)?

What happens during the feedback step of the portfolio management process?

Why is it important to assign policy weights to each eligible asset class?

What is the role of the portfolio manager during portfolio construction?

Study Notes

Portfolio Management

Key Concepts

Portfolio Construction

Portfolio Monitoring and Rebalancing

Performance Evaluation

Risk and Return Objectives

Calculations and Measurements

Studying That Suits You

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