Portfolio Management Basics

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

Which primary investment objective entails ensuring that the invested capital remains largely intact?

Safety of principal (correct)

Income

Growth of capital

Liquidity

What is a potential consequence if a client's main concern is safety of principal?

Higher capital growth opportunities

Increased income return without risk

Acceptance of lower income return (correct)

Complete liquidity of investments

Which investment security is noted for offering a high degree of safety when held to maturity?

High-yield corporate bonds

Real estate investment trusts (REITs)

Federal, provincial, and municipal bonds (correct)

Stock options

In the process of advising a client, what should be jointly determined regarding investment objectives?

The appropriate balance among all objectives Signup and view all the answers

Which of the following is NOT typically considered a primary investment objective?

Liquidity Signup and view all the answers

What is the primary goal in the first step of the portfolio management process?

Determine investment objectives and constraints Signup and view all the answers

Which step involves creating a framework to guide investment decisions?

Designing an Investment Policy Statement Signup and view all the answers

In the context of portfolio management, what is the difference between security selection and asset allocation?

Security selection determines specific investments, while asset allocation involves spreading risk across asset classes. Signup and view all the answers

What is the purpose of rebalancing a portfolio?

To ensure that the current asset mix remains aligned with the initial investment objectives Signup and view all the answers

Which metric would be most relevant in Step 6 of the portfolio management process?

Total Return and Risk Adjusted Rate of Return Signup and view all the answers

What is the typical long-term strategic asset allocation percentage range for cash in a portfolio?

5% to 10% Signup and view all the answers

Which of the following is NOT considered a fixed-income security?

Convertible preferred shares Signup and view all the answers

Which factor does NOT govern the amount of a portfolio allocated to fixed-income securities?

The desire for quick trading opportunities Signup and view all the answers

What is the primary purpose of including fixed-income products in a portfolio?

To produce income and provide principal safety Signup and view all the answers

In portfolio management, preferred shares are classified under fixed-income securities primarily due to their:

Stable levels of income and cash flow characteristics Signup and view all the answers

What is the primary purpose of the return objective in a client's investment strategy?

To measure the expected average annual earnings of the portfolio Signup and view all the answers

How should the risk objective be formulated in relation to the return objective?

It should define the client's ability to sustain risk for return Signup and view all the answers

What major factor is considered when assessing a client's risk profile?

The client's long-term investment duration Signup and view all the answers

Why is understanding a client's tax position important in investment policy design?

It influences the ratio of interest income, capital gains, and dividend income Signup and view all the answers

What is a common misconception regarding a client's risk profile and portfolio risk?

The overall portfolio risk is usually higher than its holdings Signup and view all the answers

Study Notes

Portfolio Management Process

This chapter introduces a seven-step portfolio management process
The process involves determining investment objectives and constraints; designing an investment policy statement; developing an asset mix; selecting securities; monitoring the client, market, and economy; evaluating portfolio performance; and rebalancing the portfolio.

Learning Objectives

Describe various investment objectives and constraints.
Describe the purpose and use of an investment policy statement.
Explain how asset classes are used to construct an appropriate asset mix.
Differentiate between security selection and asset allocation.
Describe the process for monitoring the portfolio.
Calculate and interpret total return and risk-adjusted rate of return of a portfolio.
Define the purpose of rebalancing the portfolio.

Key Terms

Asset allocation: The proportion of assets in a portfolio invested in different asset classes
Benchmark: A standard against which a portfolio's performance is measured
Dynamic asset allocation: A strategy for altering asset allocation based on market trends.
Investment policy statement: A written agreement defining investment objectives, constraints, and guidelines.
Risk-adjusted rate of return: A measure of return considering the risk involved.
Sharpe ratio: A measure of risk-adjusted return, calculated as (portfolio return - risk-free rate) / portfolio standard deviation
Strategic asset allocation: The long-term target asset mix
Tactical asset allocation: Short-term deviations from the strategic asset mix

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Test your knowledge on essential concepts of portfolio management and investment objectives. This quiz covers key principles, safety of principal, and the steps involved in the portfolio management process. Perfect for those studying investment strategies or taking finance-related courses.