Portfolio Management CFA 87

Which of the following statements is most accurate about integrating ESG considerations into portfolio planning and construction? A)Investors who engage in active ownership to pursue their ESG considerations should vote their shares themselves rather than delegating share voting to an investment manager. B)A broad market index is an inappropriate benchmark for a portfolio that uses negative screening to address the investor's ESG concerns. C)Integrating ESG considerations into portfolio planning and construction is likely to decrease portfolio returns.

a broad market index is an inappropriate benchmark for a portfolio that uses negative screening to address the investors ESG concerns

A firm that invests the majority of a portfolio to track a benchmark index, and uses active investment strategies for the remaining portion, is said to be using: A)a core-satellite approach. B)risk budgeting. C)strategic asset allocation.

a core-satellite approach

In the top-down approach to asset allocation, industry analysis should be conducted before company analysis because: A)the goal of the top-down approach is to identify those companies in non-cyclical industries with the lowest P/E ratios. B)most valuation models recommend the use of industry-wide average required returns, rather than individual returns. C)an industry's prospects within the global business environment are a major determinant of how well individual firms in the industry perform.

an industry's prospects within the global business environment are a major determinant of how well individual firms in the industry perform

Measures of interest rate sensitivity least likely include: A)beta. B)duration. C)rho.

beta

Brian Nebrik, CFA, meets with a new investment management client. They compose a statement that defines each of their responsibilities concerning this account and choose a benchmark index with which to evaluate the account's performance. Which of these items should be included in the client's Investment Policy Statement (IPS)? A)Neither of these items. B)Both of these items. C)Only one of these items.

both of these items

Which of the following actions is best described as taking place in the execution step of the portfolio management process? A)Rebalancing the portfolio. B)Developing an investment policy statement. C)Choosing a target asset allocation.

choosing a target asset allocation

A pooled investment with a share price significantly different from its net asset value (NAV) per share is most likely a(n): A)open-end fund. B)closed-end fund. C)exchange-traded fund.

closed-end fund

Greg Brown receives new information regarding one of his stocks. This information appears to be reliable and conflicts with Brown's earlier forecast of what the stock should be trading for at this time. However, Brown does not revise his estimate of the stock's value. Brown is most likely exhibiting: A)conservatism bias. B)confirmation bias. C)hindsight bias.

conservatism bias

Examples of financial risks include: A)credit risk, market risk, and liquidity risk. B)market risk, liquidity risk, and tax risk. C)solvency risk, credit risk, and market risk.

credit risk, market risk, and liquidity risk

High risk tolerance, a long investment horizon, and low liquidity needs are most likely to characterize the investment needs of a(n): A)bank. B)defined benefit pension plan. C)insurance company.

defined benefit pension plan

Which of the following institutional investors is most likely to have low liquidity needs? A)Bank. B)Property insurance company. C)Defined benefit pension plan.

defined benefit pension plan

Features of a risk management framework least likely include: A)establishing risk governance policies and processes. B)monitoring the organization's risk exposures. C)disciplining managers who exceed their risk budgets.

disciplining managers who exceed their risk budgets

In a defined contribution pension plan, investment risk is borne by the: A)employee. B)employer. C)plan manager.

employee

In a defined contribution pension plan, investment risk is borne by the: A)employee. B)plan sponsor. C)fund manager.

employee

Harvey Woodman invests in modern art. Occasionally, he sells a piece from his collection, but the process is often difficult because he gets insulted when potential buyers offer what he believes to be too little. Which bias is Woodman most likely exhibiting? A)Endowment bias. B)Mental accounting bias. C)Overconfidence bias.

endowment bias

Which of the following would be assessed first in a top-down valuation approach? A)Industry return on equity (ROE). B)Fiscal policy. C)Industry risks.

fiscal policy

Which of the following should least likely be included as a constraint in an investment policy statement (IPS)? A)Constraints put on investment activities by regulatory agencies. B)Any unique needs or preferences an investor may have. C)How funds are spent after being withdrawn from the portfolio.

how funds are spent after being withdrawn from the portfolio

Operational risk is most accurately described as the risk that: A)the organization will run out of operating cash. B)extreme events are more likely than managers have assumed. C)human error or faulty processes will cause losses.

human error or faulty processes will cause losses

Which of the following is NOT a rationale for the importance of the policy statement in investing? It: A)helps investors understand the risks and costs of investing. B)identifies specific stocks the investor may wish to purchase. C)forces investors to understand their needs and constraints.

identifies specific stock the investor may wish to purchase

An objective of the risk management process is to: A)eliminate the risks faced by an organization. B)identify the risks faced by an organization. C)minimize the risks faced by an organization.

identify the risks faced by an organization

An endowment is required by statute to pay out a minimum percentage of its asset value each period to its beneficiaries. This investment constraint is best classified as: A)legal and regulatory. B)liquidity. C)unique circumstances.

legal and regulatory

Which of the following factors is least likely to affect an investor's risk tolerance? A)Level of insurance coverage. B)Level of inflation in the economy. C)Number of dependent family members.

level of inflation in the economy

An individual investor specifies to her investment advisor that her portfolio must produce a minimum amount of cash each period. This investment constraint is best classified as: A)legal and regulatory. B)liquidity. C)unique circumstances.

liquidity

Endowments and foundations typically have investment needs that can be characterized as: A)long time horizon, high risk tolerance, and low liquidity needs. B)long time horizon, low risk tolerance, and high liquidity needs. C)short time horizon, low risk tolerance, and low liquidity needs.

long time horizon, high risk tolerance, and low liquidity needs

Which of the following statements is NOT consistent with the assumption that individuals are risk averse with their investment portfolios? A)Many individuals purchase lottery tickets. B)Higher betas are associated with higher expected returns. C)There is a positive relationship between expected returns and expected risk.

many individuals purchase lottery tickets

Rex Newman treats wages differently from bonuses when determining his savings and investment goals. As a result, he invests any available after-tax wages in low-risk investments while investing his bonuses in high-risk alternatives. Newman is most likely exhibiting: A)framing bias. B)availability bias. C)mental accounting bias.

mental accounting bias

Compared to emotional biases, cognitive errors are more likely to be: A)difficult to overcome. B)mitigated by information. C)related to intuition or impulses.

mitigated by information

Which of the following risks is most accurately classified as a non-financial risk? A)Model risk. B)Credit risk. C)Liquidity risk.

model risk

A mutual fund that invests in short-term debt securities and maintains a net asset value of $1.00 per share is best described as a: A)balanced fund. B)bond mutual fund. C)money market fund.

money market fund

Which of the following statements about active and passive asset management is most accurate? A)Active management has been gaining market share over time versus passive management. B)Active management may use fundamental analysis, technical analysis, or a "smart beta" approach to outperform a chosen benchmark. C)Passive management's share of industry revenues is smaller than its share of assets under management.

passive management share of industry revenues is smaller than its hare of assets under management

Identifying a benchmark for a client portfolio is most likely to be part of the: A)execution step. B)feedback step. C)planning step.

planning step

A pooled investment fund buys all the shares of a publicly traded company. The fund reorganizes the company and replaces its management team. Three years later, the fund exits the investment through an initial public offering of the company's shares. This pooled investment fund is best described as a(n): A)event-driven fund. B)private equity fund. C)venture capital fund.

private equity fund

Categories of investment constraints in an investment policy statement least likely include: A)tax concerns. B)liquidity needs. C)risk tolerance.

risk tolerance

A portfolio manager uses a computer model to estimate the effect on a portfolio's value from both a 3% increase in interest rates and a 5% depreciation in the euro relative to the yen. The manager is most accurately described as engaging in: A)scenario analysis. B)stress testing. C)risk shifting.

scenario analysis

Risk governance is best described as: A)senior management's oversight of the organization's risk management. B)determining an organization's risk tolerance. C)allocating an organization's resources by considering their risk characteristics.

senior management's oversight of the organization's risk management

Which of the following are considered emotional biases? A)Anchoring and adjustment bias. B)Status quo and endowment biases. C)Confirmation, control, and availability biases.

status quo and endowment biases

Value-at-Risk (VaR) and Conditional VaR are best described as measures of: A)liquidity risk. B)model risk. C)tail risk.

tail risk

Which of the following would least likely be considered a minimum requirement of an IPS? A(n): A)target return figure. B)benchmark portfolio. C)investment strategy based on client circumstances and constraints.

target return figure

All of the following affect an investor's risk tolerance EXCEPT: A)tax bracket. B)years of experience with investing in the markets. C)family situation.

tax bracket

The top-down analysis approach is most likely to be employed in which step of the portfolio management process? A)The planning step. B)The feedback step. C)The execution step.

the execution step

The major components of a typical investment policy statement (IPS) least likely include: A)investment objectives. B)duties and responsibilities of the investment manager. C)the investment manager's compensation.

the investment managers compensation

Which of the following most accurately describes cognitive errors? A)They are not related to conscious thought. B)They are due primarily to faulty reasoning. C)They stem from feelings, impulses, or intuition.

they are due primarily to faulty reasoning

The investment needs of a property and casualty insurance company are most likely different from the investment needs of a life insurance company with respect to: A)risk tolerance. B)liquidity needs. C)time horizon.

time horizon

Buying insurance is best described as a method for an organization to: A)prevent a risk. B)shift a risk. C)transfer a risk.

transfer a risk

Which of the following portfolio constraints in the Investment Policy Statement of a local college's endowment most likely belongs in the "unique circumstances" category? The endowment is: A)exempt from taxes. B)subject to oversight by a regulatory authority. C)unwilling to invest in companies that sell weapons.

unwilling to invest in companies that sell weapons

Which of the following is typically the first general step in the portfolio management process? A)Specify capital market expectations. B)Develop an investment strategy. C)Write a policy statement.

write a policy statement

While assessing an investor's risk tolerance, a financial adviser is least likely to ask which of the following questions? A)"How much insurance coverage do you have?" B)"Is your home life stable?" C)"What rate of investment return do you expect?"

"what rate of investment return do you expect?"

Promised payments to pension beneficiaries are a responsibility of the plan sponsor in: A)a defined contribution plan only. B)a defined benefit plan only. C)both a defined benefit plan and a defined contribution plan.

a defined benefit plan only

An investment manager is most likely to be engaging in tactical asset allocation if she: A)allocates more than the targeted 10% to emerging market bonds because the sector appears to be undervalued. B)allocates 5% to cash, 20% to fixed income, and 75% to equities based on the investor's long time horizon and high risk tolerance. C)increases the allocation to tax-free bonds because the investor's effective tax rate has increased.

allocates more than the targeted 10% to emerging market bonds because the sector appears to be undervalued

Which of the following behavioral biases is most likely related to information processing? A)Anchoring and adjustment. B)Status quo. C)Loss aversion.

anchoring and adjustment

When performing strategic asset allocation, properly defined and specified asset classes should: A)approximate the investor's total investable universe as a group. B)each contain assets that have a broad range of risk and expected return. C)have high returns correlations with other asset classes.

approximate the investors total investable universe as a group

The execution step in the portfolio management process is most likely to include: A)asset allocation and security analysis. B)performance measurement and portfolio rebalancing. C)preparation of an investment policy statement.

asset allocation and security analysis

Which of the following statements best describes the availability bias? An investor: A)bases a decision on how the information is presented. B)only notices information that agrees with their perceptions or beliefs. C)associates new information with an easily recalled past event.

associates new information with an easily

Steven Murphy has a tendency of overreacting to current events and trading too much based on news or anecdotes. Which of the following biases does Murphy most likely exhibit? A)Availability bias. B)Loss-aversion bias. C)Overconfidence bias.

availability bias

A return objective is said to be relative if the objective is: A)compared to a specific numerical outcome. B)stated in terms of probability. C)based on a benchmark index or portfolio.

based on a benchmark index or portfolio

Which of the following are considered biases due to cognitive errors? A)Conservatism, hindsight, and framing biases. B)Representativeness, mental accounting, and overconfidence biases. C)Loss aversion, self-control, and regret-aversion biases.

conservatism, hindsight, and framing biases

Which of the following cognitive errors are best described as belief persistence biases? A)Conservatism, representativeness, and hindsight biases. B)Mental accounting, framing, and availability biases. C)Illusion of control, confirmation, and anchoring and adjustment biases.

conservatism, representativeness, and hindsight biases

The portfolio approach to investing is best described as evaluating each potential investment based on its: A)potential to generate excess return for the investor. B)fundamentals such as the financial performance of the security issuer. C)contribution to the investor's overall risk and return.

contribution to the investors overall risk and return

The ratio of an equally weighted portfolio's standard deviation of return to the average standard deviation of the securities in the portfolio is known as the: A)diversification ratio. B)relative risk ratio. C)Sharpe ratio.

diversification ratio

Which of the following asset class specifications is most appropriate for asset allocation purposes? A)Domestic bonds. B)Consumer discretionary. C)Emerging markets.

domestic bonds

In the Markowitz framework, an investor should most appropriately evaluate a potential investment based on its: A)effect on portfolio risk and return. B)expected return. C)intrinsic value compared to market value.

effect on portfolio risk and return

Based on a questionnaire about investment risk, an advisor concludes that an investor's risk tolerance is high, but based on an analysis of the client's income needs and time horizon, he concludes the investor's risk tolerance is low. The most appropriate action for the advisor is to: A)emphasize stocks over bonds. B)emphasize bonds over stocks. C)educate the client about investment risk and re-administer the questionnaire.

emphasize bonds over stock

Which of the following statements about the importance of risk and return in the investment objective is least accurate? A)The investor's risk tolerance is likely to determine what level of return will be feasible. B)The return objective may be stated in dollar amounts even if the risk objective is stated in percentages. C)Expressing investment goals in terms of risk is more appropriate than expressing goals in terms of return.

expressing investment goals in terms of risk is more appropriate than expressing goals in term of return

Which of the following statements would most likely be classified as a cognitive error? The investor: A)tends to take more risk rather than sell a stock at a loss. B)has a tendency to place information into categories. C)acts defensively when asked why he made a poor investment decision.

has tendency to place information into categories

When preparing a strategic asset allocation, how should asset classes be defined with respect to the correlations of returns among the securities in each asset class? A)High correlation within asset classes and low correlation between asset classes. B)Low correlation within asset classes and low correlation between asset classes. C)Low correlation within asset classes and high correlation between asset classes.

high correlation within asset classes and low correlation between asset classes

With respect to asset "bubbles": A)behavioral finance provides an overall explanation. B)hindsight bias can fuel overconfidence. C)anchoring may cause investors to mitigate bubbles by reducing their market exposure.

hindsight bias can fuel overconfidence

Risk management within an organization should most appropriately consider: A)financial risks independently of non-financial risks. B)internal risks independently of external risks. C)interactions among different risks.

interactions among different risks

Which of the following statements about investment constraints is least accurate? A)Diversification efforts can increase tax liability. B)Investors concerned about time horizon are not likely to worry about liquidity. C)Unwillingness to invest in gambling stocks is a constraint.

investors concerned about time horizon are not likely to worry about liquidity

Sarah Kowalski bought a growth stock for $45 per share that subsequently fell by 35%, and she is reluctant to sell as she hopes the stock bounces back. Kowalski is most likely exhibiting: A)availability bias. B)loss-aversion bias. C)self-control bias.

loss-aversion bias

If an investor's ability to bear risk is low and willingness to bear risk is high, an investment manager should most appropriately consider the investor's overall financial risk tolerance to be: A)high. B)moderate. C)low.

low

MAL Investments is an asset management company that consists of three subsidiaries: one that focuses on mid-cap value stocks, one that focuses on alternative assets, and one that focuses on long-term emerging market sovereign debt. MAL is most accurately described as a: A)full-service asset manager. B)multi-boutique firm. C)specialist asset manager.

multi-boutique firm

Open-end mutual funds differ from closed-end funds in that: A)open-end funds issue shares that are then traded in secondary markets, while closed-end funds do not. B)open-end funds stand ready to redeem their shares, while closed-end funds do not. C)closed-end funds require active management, while open-end funds do not.

open-end funds stand ready to redeem their shares, while closed-end funds do not

Which of the following pooled investment shares is least likely to trade at a price different from its NAV? A)Closed-end mutual fund shares. B)Open-end mutual fund shares. C)Exchange-traded fund shares.

open-end mutual fund shares

Evidence that investors hold portfolios that are less diversified than traditional finance would suggest may be best explained by: A)fear of regret. B)anchoring. C)overconfidence.

overconfidence

Which of the following is not necessarily included in an investment policy statement? A)Procedures to update the IPS when circumstances change. B)An investment strategy based on the investor's objectives and constraints. C)A benchmark against which to judge performance.

procedures to update the IPS when circumstances change

Which of the following types of investors is likely to have the shortest investment horizon? A)Foundation. B)Life insurance company. C)Property and casualty insurance company.

property and casualty insurance company

Which of the following statements about risk and return is least accurate? A)Return objectives may be stated in absolute terms. B)Risk and return may be considered on a mutually exclusive basis. C)Specifying investment objectives only in terms of return may expose an investor to inappropriately high levels of risk.

risk and return may be considered on a mutually exclusive basis

Which of the following is least likely to be considered a constraint when preparing an investment policy statement? A)Liquidity needs. B)Risk tolerance. C)Tax concerns.

risk tolerance

Which of the following statements about risk is NOT correct? Generally, greater: A)existing wealth allows for greater risk. B)insurance coverage allows for greater risk. C)spending needs allows for greater risk.

spending needs allows for greater risk

Emotional biases are most likely to: A)stem from feelings or intuition. B)be mitigated rather than accommodated. C)be related to faulty reasoning.

stem from feelings or intuition

A portfolio manager who believes equity securities are overvalued in the short term reduces the weight of equities in her portfolio to 35% from its longer-term target weight of 40%. This decision is best described as an example of: A)rebalancing. B)strategic asset allocation. C)tactical asset allocation.

tactical asset allocation

Davis Samuel, CFA, is meeting with one of his portfolio management clients, Joseph Pope, to discuss Pope's investment constraints. Samuel has established that: Pope plans to retire from his job as a bond salesman in 17 years, after which this portfolio will be his primary source of income. Pope has sufficient cash available that he will not need this portfolio to generate cash outflows until he retires. Pope, as a registered securities representative, is required to have Samuel send a copy of his account statements to the compliance officer at Pope's employer. Pope opposes certain policies of the government of Lower Pannonia and does not wish to own any securities of companies that do business with its regime. To complete his assessment of Pope's investment constraints, Samuel still needs to inquire about Pope's: A)tax concerns. B)liquidity needs. C)unique circumstances.

tax concerns

An investment manager has constructed an efficient frontier based on a client's investable asset classes. The strategic asset allocation for the client should be the asset allocation of one of these efficient portfolios, selected based on: A)a risk budgeting process. B)the relative valuations of the investable asset classes. C)the client's investment objectives and constraints.

the clients investment objectives and constraints

In a defined benefit pension plan: A)the employee is promised a periodic payment upon retirement. B)the employee is responsible for making investment decisions. C)the employer's pension expense is equal to its contributions to the plan.

the employee is promised a periodic payment upon retirement

Which of the following statements about an organization's risk tolerance is most accurate? A)An organization with low risk tolerance should take steps to reduce each of the risks it identifies. B)Risk tolerance is the degree to which an organization is able to bear the various risks that may arise from outside the organization. C)The financial strength of an organization is one of the factors it should consider when determining its risk tolerance.

the financial strength of an organization is one of the factors it should consider when determining its risk tolerance

Which of the following pooled investments is least likely to employ large amounts of leverage? A)Venture capital fund. B)Private equity buyout fund. C)Global macro hedge fund.

venture capital fund

When developing the strategic asset allocation in an IPS, the correlations of returns: A)among asset classes should be relatively high. B)within an asset class should be relatively high. C)within an asset class should be relatively low.

within an asset class should be relatively high