Conceptual Questions Portfolio Management (CFA Prep)

Which of the following asset classes has historically had the highest returns and standard deviation? A)Small-cap stocks. B)Large-cap stocks. C)Long-term corporate bonds.

A)Small-cap stocks.

A long time horizon and low liquidity requirements best describe the investment needs of: A)an endowment. B)an insurance company. C)a bank.

A)an endowment.

As the number of stocks in a portfolio increases, the portfolio's systematic risk: A)can increase or decrease. B)decreases at a decreasing rate. C)decreases at an increasing rate.

A)can increase or decrease.

Portfolio diversification is least likely to protect against losses: A)during severe market turmoil. B)when markets are operating normally. C)when the portfolio securities have low return correlation.

A)during severe market turmoil.

An analyst who uses the standard deviation of recent prices to identify overbought or oversold conditions is most likely to employ: A)Bollinger bands. B)a Relative Strength Index. C)a rate of change oscillator.

A)Bollinger bands.

Which of the following is most appropriately termed a financial risk? A)Credit risk. B)Solvency risk. C)Settlement risk.

A)Credit risk.

A written investment policy statement should most appropriately: A)establish a target asset allocation strategy. B)focus predominantly on a long-term time horizon. C)include risk objectives that are consistent with the investor's return requirements.

A)establish a target asset allocation strategy.

An assumption of technical analysis is that market prices: A)exhibit identifiable trends and patterns that persist and repeat. B)are the only information necessary to analyze a freely trading market. C)reflect supply and demand conditions because actual transactions reflect rational decisions by buyers and sellers.

A)exhibit identifiable trends and patterns that persist and repeat.

Effective risk management would most likely attempt to: A)maximize expected return for a given level of risk. B)minimize risk for a given level of expected return. C)reduce any significant risks the firm is exposed to.

A)maximize expected return for a given level of risk.

An investor has the most control over her portfolio's: A)risk. B)relative returns. C)risk-adjusted returns.

A)risk.

A return generating model is least likely to be based on a security's exposure to: A)statistical factors. B)macroeconomic factors. C)fundamental factors.

A)statistical factors.

Fintech is most accurately described as: A)the application of technology to the financial services industry. B)the replacement of government-issued money with electronic currencies. C)the clearing and settling securities trades through distributed ledger technology.

A)the application of technology to the financial services industry.

In a defined contribution pension plan: A)the employee accepts the investment risk. B)the plan sponsor promises a predetermined retirement income to participants. C)the plan manager attempts to match the fund's assets to its liabilities.

A)the employee accepts the investment risk.

The component of an investment policy statement that defines the investment objectives is most likely to include information about: A)the investor's risk tolerance. B)unique needs and preferences of the investor. C)permitted asset types and use of leverage in the investment account.

A)the investor's risk tolerance.

The investment policy statement is most accurately considered: A)the starting point of the portfolio management process. B)the key intermediate step in the portfolio management process. C)the end product of the portfolio management process.

A)the starting point of the portfolio management process.

A key criticism of robo-advisory services is that: A)they are costly for investors to use. B)the reasoning behind their recommendations can be unclear. C)they tend to produce overly aggressive investment recommendations.

B)the reasoning behind their recommendations can be unclear.

Risk shifting is most likely achieved by: A)risk mitigation. B)using derivative securities. C)transferring risk to an insurance company.

B)using derivative securities.

Which of the following statements about risk-averse investors is most accurate? A risk-averse investor: A)seeks out the investment with minimum risk, while return is not a major consideration. B)will take additional investment risk if sufficiently compensated for this risk. C)avoids participating in global equity markets.

B)will take additional investment risk if sufficiently compensated for this risk.

Which of the following risk management strategies is most accurately described as shifting a risk? A)A retail store owner buys a fire insurance policy on the building. B)A farmer takes a short position in a futures contract to deliver wheat. C)A portfolio manager diversifies her investments across different industries.

B)A farmer takes a short position in a futures contract to deliver wheat.

From which of the following charts can an analyst read the opening price for a trading period? A)Line chart. B)Candlestick chart. C)Point-and-figure chart.

B)Candlestick chart.

An increase in which of the following is most likely when stock market sentiment is becoming more bullish? A)Short interest ratio. B)Margin debt outstanding. C)Put/call ratio for a stock index.

B)Margin debt outstanding.

For an asset with a current price of 100, which of the following price targets is most likely based on a Fibonacci ratio? A)129.40. B)145.60. C)161.80.

C)161.80.

The Kondratieff wave is a cycle of: A)18 years. B)36 years. C)54 years.

C)54 years.

Which of the following is least likely to be considered an appropriate schedule for reviewing and updating an investment policy statement? A)At regular intervals (e.g., every year). B)When there is a major change in the client's constraints. C)Frequently, based on the recent performance of the portfolio.

C)Frequently, based on the recent performance of the portfolio.

Which of the following is least likely an example of a portfolio constraint? A)Higher tax rate on dividend income than on capital gains. B)Significant spending requirements in the near future. C)Minimum total return requirement of 8%.

C)Minimum total return requirement of 8%.

Which of the following statements about the SML and the CML is least accurate? A)Securities that plot above the SML are undervalued. B)Investors expect to be compensated for systematic risk. C)Securities that plot on the SML have no value to investors.

C)Securities that plot on the SML have no value to investors.

What is the risk measure associated with the capital market line (CML)? A)Beta risk. B)Unsystematic risk. C)Total risk.

C)Total risk.

Which of these return metrics is defined as excess return per unit of systematic risk? A)Sharpe ratio. B)Jensen's alpha. C)Treynor measure.

C)Treynor measure.

Low risk tolerance and high liquidity requirements best describe the typical investment needs of: A)a defined-benefit pension plan. B)a foundation. C)an insurance company.

C)an insurance company.

Hedge funds most likely: A)have stricter reporting requirements than a typical investment firm because of their use of leverage and derivatives. B)hold equal values of long and short securities. C)are not offered for sale to the general public.

C)are not offered for sale to the general public.

A client exhibits an above-average willingness to take risk but a below-average ability to take risk. When assigning an overall risk tolerance, the investment adviser is most likely to assess the client's overall risk tolerance as: A)above average. B)average. C)below average.

C)below average.

Which of the following activities is most likely to be performed as part of the execution step of the portfolio management process? A)Completion of the investment policy statement. B)Top-down analysis based on macroeconomic conditions. C)Rebalancing the portfolio to the desired asset class exposures.

B)Top-down analysis based on macroeconomic conditions.

A manager who evaluates portfolios' investment performance adjusted for systematic risk is most likely to rank portfolios based on their: A)Sharpe ratios. B)Treynor measures. C)M-squared measures.

B)Treynor measures.

A momentum indicator based on the ratio of price increases to price decreases over the last 14 days is most likely a: A)a stochastic oscillator. B)a Relative Strength Index. C)a moving average convergence/divergence oscillator.

B)a Relative Strength Index.

A portfolio to the right of the market portfolio on the CML is: A)a lending portfolio. B)a borrowing portfolio. C)an inefficient portfolio.

B)a borrowing portfolio.

Neural networks are an example of: A)machine learning. B)artificial intelligence. C)algorithmic trading applications.

B)artificial intelligence.

For asset allocation purposes, asset classes should be specified such that correlations of returns are relatively: A)low within each asset class and low among asset classes. B)high within each asset class and low among asset classes. C)low within each asset class and high among asset classes.

B)high within each asset class and low among asset classes

In determining the appropriate asset allocation for a client's investment account, the manager should: A)consider only the investor's risk tolerance. B)incorporate forecasts of future economic conditions. C)consider the investor's risk tolerance and future needs, but not forecasts of market conditions.

B)incorporate forecasts of future economic conditions.

Portfolios that plot inside the minimum-variance frontier represent: A)efficient portfolios. B)inefficient portfolios. C)unattainable portfolios.

B)inefficient portfolios.

If a stock's relative strength ratio increases, the stock is: A)increasing in price. B)outperforming its benchmark. C)increasing on high volume or decreasing on low volume.

B)outperforming its benchmark.

Private equity and venture capital funds: A)expect that only a small percentage of investments will pay off. B)play an active role in the management of companies. C)restructure companies to increase cash flow.

B)play an active role in the management of companies.

Risk budgeting can best be described as: A)setting an annual limit on risk taken. B)selecting assets by their risk characteristics. C)establishing a maximum amount of risk to be taken.

B)selecting assets by their risk characteristics.

A measure of how the returns of two risky assets move in relation to each other is: A)the range. B)the covariance. C)the standard deviation.

B)the covariance.

When an investment advisor is developing return and risk objectives for a client: A)return objectives should be absolute and risk objectives should be relative. B)risk objectives should be absolute and return objectives should be relative. C)both return and risk objectives may be stated in absolute or relative terms.

C)both return and risk objectives may be stated in absolute or relative terms.

A top-down security analysis begins by: A)analyzing a firm's business prospects and quality of management. B)identifying the most attractive companies within each industry. C)examining economic conditions.

C)examining economic conditions.

A risk management framework least likely includes: A)risk governance, risk mitigation, and strategic risk analysis. B)identifying and measuring risks, risk policies and processes, and risk governance. C)risk mitigation, tracking the organization's risk profile, and establishing position limits.

C)risk mitigation, tracking the organization's risk profile, and establishing position limits.

Total risk equals: A)unique plus diversifiable risk. B)market plus nondiversifiable risk. C)systematic plus unsystematic risk.

C)systematic plus unsystematic risk.

In a defined benefit pension plan: A)the employee assumes the investment risk. B)the employer contributes to the employee's retirement account each period. C)the plan sponsor promises a predetermined retirement income to participants.

C)the plan sponsor promises a predetermined retirement income to participants.

A stock has been in a downtrend for several days. When its price decreases to near $30, many investors enter orders to buy the stock and the price increases to $31. This is most likely an example of: A)a support level. B)a resistance level. C)a change in polarity.

A)a support level.

Compared to exchange-traded funds (ETFs), open-end mutual funds are typically associated with lower: A)brokerage costs. B)minimum investment amounts. C)management fees.

A)brokerage costs.

Which of the following statements about correlation is least accurate? A)Diversification reduces risk when correlation is less than +1. B)If the correlation coefficient is 0, a zero variance portfolio can be constructed. C)The lower the correlation coefficient, the greater the potential benefits from diversification.

B)If the correlation coefficient is 0, a zero variance portfolio can be constructed.

Which of the following statements about covariance and correlation is least accurate? A)A zero covariance implies there is no linear relationship between the returns on two assets. B)If two assets have perfect negative correlation, the variance of returns for a portfolio that consists of these two assets will equal zero. C)The covariance of a 2-stock portfolio is equal to the correlation coefficient times the standard deviation of one stock's returns times the standard deviation of the other stock's returns.

B)If two assets have perfect negative correlation, the variance of returns for a portfolio that consists of these two assets will equal zero.

Which of the following statements about distributed ledger technology is most accurate? A)A disadvantage of blockchain is that past records are vulnerable to manipulation. B)Tokenization can potentially streamline transactions involving high-value physical assets. C)Only parties who trust each other should carry out transactions on a permissionless network.

B)Tokenization can potentially streamline transactions involving high-value physical assets.