IFSE Institute 233 Unit 7: Passive Portfolio Management

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Which section of the financial statements includes cash inflows and outflows from daily activities?

Financing Activities
Operating Activities (correct)
Statement of Retained Earnings
Investing Activities

What is the purpose of the Statement of Retained Earnings?

To determine the company's net income
To capture what is distributed to shareholders and what is retained by the company (correct)
To report financing activities such as borrowing money
To capture cash inflows and outflows from investments

What can companies use retained earnings for?

Only to reinvest in the company
Neither to pay off existing debt nor reinvest in the company
Only to pay off existing debt
Either to pay off existing debt or reinvest in the company (correct)

What is the purpose of Notes to Financial Statements?

To clarify financial statements or provide additional information (D) Signup and view all the answers

What is included in Investing Activities?

Cash expenditures for the purchase of assets or cash receipts through the sale of assets (D) Signup and view all the answers

What is Financing Activities?

Includes cash raised by borrowing money or the issuance of shares (D) Signup and view all the answers

What is the purpose of the Statement of Retained Earnings in relation to the previous retained earnings balance?

To carry forward the previous retained earnings balance and add the net profit (C) Signup and view all the answers

Why is it important to study Notes to Financial Statements?

Because they contain information that may be important for an accurate comprehension of financial statements (A) Signup and view all the answers

What is the primary objective of passive portfolio managers?

To replicate the return of the benchmark as closely as possible (B) Signup and view all the answers

What is the benchmark in passive portfolio management?

A market index, such as the S&P/TSX composite index (B) Signup and view all the answers

How do passive portfolio managers achieve their goal?

By purchasing the exact same securities in the same proportion as the index (A) Signup and view all the answers

What is the result of a passive investment strategy on trading within a mutual fund?

A decrease in trading activity (B) Signup and view all the answers

What is the benefit of a passive investment strategy on management expense ratios (MERs)?

MERs decrease due to lower transaction costs (A) Signup and view all the answers

What is the underlying theory of a passive investment strategy?

The Efficient Market Hypothesis (EMH) theory (C) Signup and view all the answers

What does the Efficient Market Hypothesis (EMH) theory state?

Market prices of securities reflect all publicly available information (A) Signup and view all the answers

What is the implication of the Efficient Market Hypothesis (EMH) theory?

It is futile to attempt finding mis-priced securities (B) Signup and view all the answers

What is an active portfolio manager attempting to do in the market?

Identify undervalued securities to generate higher returns. (D) Signup and view all the answers

What is a key characteristic of an active portfolio management strategy?

It has the flexibility to select securities aligned with the investment mandate. (C) Signup and view all the answers

In the first year, why did Cheri's mutual fund outperform the S&P/TSX Composite Index?

The portfolio manager found opportunities in the resource and retail sectors. (C) Signup and view all the answers

What did the portfolio manager do in the second year to respond to the market downturn?

Took profits in some holdings and held cash as a defensive move. (A) Signup and view all the answers

Why did Cheri's mutual fund drop less than the S&P/TSX Composite Index in the second year?

The portfolio manager took profits and held cash as a defensive move. (A) Signup and view all the answers

What is the primary goal of an active portfolio manager?

To generate higher returns than the market index. (B) Signup and view all the answers

How did the portfolio manager adjust the mutual fund in the first year?

Sold underperforming holdings and reallocated the cash to other investments. (A) Signup and view all the answers

What is the benefit of an active portfolio management strategy?

It has the potential to generate higher returns than the market index. (C) Signup and view all the answers

What is the total value of the portfolio in scenario 1 after one year?

$1,040 (D) Signup and view all the answers

If the price of the shares does not change, what is the impact on the end value of the portfolio?

The end value remains the same as the beginning value (B) Signup and view all the answers

What happens to the capital gain if the bond is not sold?

It remains unrealized (C) Signup and view all the answers

What is the value of the portfolio in scenario 3 after one year?

$740 (C) Signup and view all the answers

What is the end value of the portfolio in scenario 5?

$1,540 (D) Signup and view all the answers

What happens to the end value of the portfolio if the dividend is not paid in scenario 2?

It remains the same as the beginning value (D) Signup and view all the answers

What is the market value of the bond?

$1,010 (B) Signup and view all the answers

What is the capital gain if the bond is sold?

$10 (B) Signup and view all the answers

What happens to the end value in scenario 1 due to the dividend payment?

It increases by $40 (D) Signup and view all the answers

What is the unrealized capital loss in scenarios 3 and 4?

$300 (C) Signup and view all the answers

Why does the dividend payment in scenario 3 recover some of the loss?

Because the dividend payment increases the portfolio value (A) Signup and view all the answers