IFSE Institute 233 Unit 7: Passive Portfolio Management
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Questions and Answers

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?

    <p>To clarify financial statements or provide additional information</p> Signup and view all the answers

    What is included in Investing Activities?

    <p>Cash expenditures for the purchase of assets or cash receipts through the sale of assets</p> Signup and view all the answers

    What is Financing Activities?

    <p>Includes cash raised by borrowing money or the issuance of shares</p> Signup and view all the answers

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

    <p>To carry forward the previous retained earnings balance and add the net profit</p> Signup and view all the answers

    Why is it important to study Notes to Financial Statements?

    <p>Because they contain information that may be important for an accurate comprehension of financial statements</p> Signup and view all the answers

    What is the primary objective of passive portfolio managers?

    <p>To replicate the return of the benchmark as closely as possible</p> Signup and view all the answers

    What is the benchmark in passive portfolio management?

    <p>A market index, such as the S&amp;P/TSX composite index</p> Signup and view all the answers

    How do passive portfolio managers achieve their goal?

    <p>By purchasing the exact same securities in the same proportion as the index</p> Signup and view all the answers

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

    <p>A decrease in trading activity</p> Signup and view all the answers

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

    <p>MERs decrease due to lower transaction costs</p> Signup and view all the answers

    What is the underlying theory of a passive investment strategy?

    <p>The Efficient Market Hypothesis (EMH) theory</p> Signup and view all the answers

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

    <p>Market prices of securities reflect all publicly available information</p> Signup and view all the answers

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

    <p>It is futile to attempt finding mis-priced securities</p> Signup and view all the answers

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

    <p>Identify undervalued securities to generate higher returns.</p> Signup and view all the answers

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

    <p>It has the flexibility to select securities aligned with the investment mandate.</p> Signup and view all the answers

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

    <p>The portfolio manager found opportunities in the resource and retail sectors.</p> Signup and view all the answers

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

    <p>Took profits in some holdings and held cash as a defensive move.</p> 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?

    <p>The portfolio manager took profits and held cash as a defensive move.</p> Signup and view all the answers

    What is the primary goal of an active portfolio manager?

    <p>To generate higher returns than the market index.</p> Signup and view all the answers

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

    <p>Sold underperforming holdings and reallocated the cash to other investments.</p> Signup and view all the answers

    What is the benefit of an active portfolio management strategy?

    <p>It has the potential to generate higher returns than the market index.</p> Signup and view all the answers

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

    <p>$1,040</p> 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?

    <p>The end value remains the same as the beginning value</p> Signup and view all the answers

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

    <p>It remains unrealized</p> Signup and view all the answers

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

    <p>$740</p> Signup and view all the answers

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

    <p>$1,540</p> Signup and view all the answers

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

    <p>It remains the same as the beginning value</p> Signup and view all the answers

    What is the market value of the bond?

    <p>$1,010</p> Signup and view all the answers

    What is the capital gain if the bond is sold?

    <p>$10</p> Signup and view all the answers

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

    <p>It increases by $40</p> Signup and view all the answers

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

    <p>$300</p> Signup and view all the answers

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

    <p>Because the dividend payment increases the portfolio value</p> Signup and view all the answers

    What happens to the portfolio in scenarios 5 and 6?

    <p>It increases in value</p> Signup and view all the answers

    What is the status of gains or losses until the securities are sold?

    <p>Unrealized</p> Signup and view all the answers

    Why are mutual fund investors interested in performance?

    <p>Both A and B</p> Signup and view all the answers

    What happens to the prices of securities when the markets are open for trading?

    <p>They fluctuate</p> Signup and view all the answers

    What do mutual fund investors use to compare potential new investments?

    <p>Performance</p> Signup and view all the answers

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