Chapter 21

When preparing an asset allocation program, all of these would be considered asset classes except 1. equity securities 2. Brady bonds 3. Debt securities 4. Cash or cash equivalents.

Brady Bonds. Brady bonds are considered a debt security, but not an asset class. Brady bonds are issued by a developing country as a result of a restructuring of its defaulted bank debt. They are government obligations issued after the debtor nation negotiates with the creditor banks' advisory committee to restructure loans that are no longer performing.

What is strategic asset management?

It is basically a passive strategy, views the market on a long-term basis.

The risk/return pyramid where the bottom is lowest risk and the "point" is the highest, generally places commodities

at the top. Commodity funds invest in raw materials or primary agricultural products, known as commodities. These funds invest in precious metals, such as gold and silver, energy resources, such as oil and natural gas, and agricultural goods, such as wheat.

One of the assumptions underlying the capital asset pricing model is that

there are no transaction costs or taxes. Among the other assumptions of the CAPM are that all investors have the same time horizon and that all investments are infinitely divisible into fractional shares. The CAPM assumes that there is no inflation.

What attribute best describes a tactical asset allocation portfolio style?

Employs an active management style. Tactical asset allocation managers actively manage their portfolios, switching the percentage of holding in each asset category according to the performance of the asset class.

When a client believes that money managers cannot outperform the market, which of the following mutual funds is the most suitable for the customer?

An index fund, which simply mimics the market, is the appropriate investment. If a client complains about high commission charges is a further argument for index funds, which have low expense ratios.

True or False. If the efficient market hypothesis is true, portfolio managers should spend more time working on security selection.

False. In an efficient market, all stocks are properly priced and reflect all publicly available information. Therefore, individual selection of stocks is not important.

Tactical asset allocation, also known as active asset allocation, attempts to time the market. As such, there is a relatively high amount of in and out trading, causing commission expense to be

a significant factor which can impact the performance of the portfolio.