The Investment Policy

_______________represents special considerations investors face in achieving their stated objectives. a. Investment constraints. b. Investment objectives. c. Investment policies. d. Investment allocations.

a. Constraints are special considerations that investors may face and must be considered by the client and investment manager when developing the investment policy. (B)

Client responsibilities include: a. Setting objectives. b. Constructing the portfolio. c. Revising the portfolio. d. Providing portfolio progress reports.

a. The client should set the portfolio objectives (perhaps working with the investment manager). The manager then constructs the portfolio, monitors it, and revises it when appropriate. (A.1 and A.2)

Asset allocation should: a. Probably not be a major determinant of return. b. Probably be a major aspect of portfolio management. c. Be revised monthly. d. Include only stocks and bonds.

b. Asset allocation is a major part of portfolio management, and can have a significant effect on portfolio return. (C)

Preferred stock would be most appropriate for ... , a. Stability of principal. b. Income. c. Growth of income. d. Capital appreciation.

b. Because its values can fluctuate significantly, preferred stock is not appropriate for stabilizing principal. Preferred stock generally carries a fixed dividend payment, so it would not be appropriate for growth of income, either. Finally, unless it is convertible preferred stocks, and the related common stock appreciates, preferred stock generally does not appreciate much. Therefore, preferred stock is most appropriate for the purpose of income. (A. 1 )

The most common investments in a portfolio with the stability of principal and income objective are: a. Preferred stock. b. Treasury bills. c. High-yield corporate bonds. d. Common stock.

b. T-Bills are short-term, stable investments that are popular in a portfolio with an objective of stability of principal. (A. 1 )

Which of the following usually is not an investment constraint? a. Taxes. b. Liquidity. c. Asset allocation. d. Time horizon.

c. Asset allocation, while an important consideration for the client, is not considered a constraint. (B and C)

_______________refer to documentation setting forth the investor's required rate of return relative to the investor's risk tolerance and applicable constraints. a. Investment constraints. b. Investment objectives. c. Investment policies. d. Asset allocations.

c. The investment policy outlines the investor's required return and risk tolerances, and constraints. (A)

Evaluation of the portfolio manager should include: a. Firing the manager if s/he has not outperformed the market. b. Determining whether the manager is in the top 10 percent of fund managers. c. Determining whether the manager is achieving the investment objectives. d. Assuring that the asset allocation was revised monthly.

c. While return is important, management's evaluation must include assessing whether the manager is acting in a manner consistent with the established investment objectives. (D)

Comparing an investment manager's return to similar portfolios and indexes is called: a. Liquidity. b. Constraining. c. Adhering. d. Benchmarking.

d. Benchmarking is the process of comparing a manager's performance to that of a similar group of portfolios or an index. (0.3)

Which of the following assets would be least likely to be included in a portfolio with a capital appreciation objective? a. Stocks. b. Treasury bonds. c. Corporate bonds. d. Treasury bills.

d. T-Bills are low-yielding, short-term instruments that are appropriate for the stability of principal objective and perhaps the income objective, but not the capital appreciation objective. (A. 1 )