85 Portfolio Management- An Overview

Question 1

• Open-end mutual fund shares are least likely to trade at a price different from their Net Asset Value (NAV).
• Exchange-traded funds and closed-end mutual funds can deviate from their NAV.
• Open-end mutual funds trade at NAV.

Question 2

• In a defined benefit plan, the plan sponsor is responsible for promised payments to pension beneficiaries.
• Defined contribution plans do not promise fixed payments to beneficiaries.

Question 3

• Passive management represents a smaller share of industry revenues than its share of assets under management.
• Passive management has been gaining market share over time versus active management.
• Smart beta is a passive management strategy focusing on a specific market risk factor.
• Passive management has lower fees compared to active management.

Question 4

• In the top-down approach to asset allocation, industry analysis should precede company analysis.
• An industry's prospects in the global business environment is a determinant of the success of individual firms.
• The goal is to identify the best companies in the most promising industries.

Question 5

• A pooled investment with a share price significantly different from its NAV is most likely a closed-end fund.
• 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, and arbitrageurs can profit by trading when there are differences.

Question 6

• The execution step in portfolio management includes asset allocation and security analysis.
• Portfolio construction is also a component of the execution step.
• Preparation of an investment policy statement is part of the planning step.
• Portfolio monitoring, rebalancing, performance measurement, and reporting are part of the feedback step.

Question 7

• Property and casualty insurance companies are likely to have the shortest investment horizon.
• Foundations and life insurance companies have long investment horizons.
• Property and casualty insurers have shorter horizons due to claims occurring sooner.

Question 8

• In a defined contribution plan, the employee bears the investment risk.
• Employees make the investment decisions and assume the investment risk in a defined contribution plan.

Question 9

• The diversification ratio is the ratio of an equally weighted portfolio's standard deviation of return to the average standard deviation of the securities in the portfolio.
• The average standard deviation of portfolio securities is calculated over the historical measurement period.

Question 10

• Defined benefit pension plans are most likely to have low liquidity needs.
• Banks and property/casualty insurers need higher liquidity.
• Banks require liquidity for depositor withdrawals.
• Property/casualty insurers need liquidity to meet claims.

Question 11

• Choosing a target asset allocation occurs during the execution step of portfolio management.
• The planning step includes evaluating the investor's needs and preparing an investment policy statement.
• Measuring and reporting performance and monitoring and rebalancing the portfolio are part of the feedback step.

Question 12

• Property and casualty insurance companies' investment needs differ from life insurance companies regarding the time horizon.
• Property and casualty insurers have shorter investment horizons.
• Both have low risk tolerance and high liquidity needs.

Question 13

• The portfolio approach to investing evaluates each potential investment based on its contribution to the investor's overall risk and return.
• It does not evaluate investments on a standalone basis by analyzing fundamentals or potential to generate excess return.

Question 14

• Identifying a benchmark for a client portfolio is part of the planning step.
• The benchmark allows for assessing performance in the feedback step.

Question 15

• High risk tolerance, a long investment horizon, and low liquidity needs characterize a defined benefit pension plan.
• Insurance companies and banks have low-risk tolerance and high liquidity needs.
• Banks and property/casualty insurers have short investment horizons.

Question 16

• Venture capital funds are least likely to employ large amounts of leverage.
• Hedge funds and buyout firms use high leverage to acquire assets.
• Venture capital involves an equity interest.

Question 17

• In a defined contribution pension plan, the employee bears the investment risk.
• The plan sponsor makes payments to retirement accounts, and investment risk is borne by employees.

Question 18

• In the Markowitz framework, an investor should evaluate a potential investment based on its effect on portfolio risk and return.
• Modern portfolio theory suggests considering how investments affect the risk and return characteristics of the investor's portfolio.

Question 19

• Endowments and foundations typically have long time horizons, low liquidity needs, and high-risk tolerance.
• They invest for the long term to fund a charitable cause and have low cash payout rates.

Question 20

• Writing a policy statement is typically the first step in the portfolio management process.
• Risk and return are integrated to determine investor's goals and constraints within the policy statement, serving as the foundation.

Question 21

• The top-down analysis approach is employed in the execution step of the portfolio management process for selecting securities.

Question 22

• A private equity fund acquires public companies, takes them private, and reorganizes them.
• An event-driven fund invests in response to corporate events.
• Venture capital funds invest in start-up companies.

Question 23

• A money market fund invests in short-term debt and maintains a $1.00 NAV per share.
• Bond mutual funds invest in longer-maturity securities.
• Balanced funds invest in both debt and equity.

Question 24

• Open-end funds stand ready to redeem their shares, unlike closed-end funds.
• Open-end funds redeem existing shares or issue new shares based on demand.
• Closed-end funds have a fixed number of shares that trade on exchanges.

Question 25

• Fiscal policy is assessed first in a top-down valuation approach.
• The investor should analyze macroeconomic influences first, which includes fiscal policy. Then, industry and company influences.

Question 26

• In a defined benefit plan, the employee is promised a periodic payment upon retirement.
• The employer contributes to an investment trust to meet the pension obligation.
• Employees do not direct investments.

Question 27

• MAL Investments is a multi-boutique firm as it is a holding company with different specialist asset managers.
• Each subsidiary focuses on different assets.