Unit 7.8 Portfolio Benchmarks (Series 65)

Under Modern Portfolio Theory (MPT), all portfolios that can be constructed from a given set of stocks is referred to as the A) feasible set B) efficient set C) capital market line D) correlation coefficient

Answer: A A feasible portfolio is defined as a portfolio that an investor can construct given the assets available. The feasible set is the collection of all feasible portfolios. Once we have the feasible set, we can select the efficient set (the most return for a given amount of risk, or the least risk for a given amount of return). Reference: 7.8.1.1 in the License Exam Manual.

A growth mutual fund may be compared against all of the following benchmarks EXCEPT: A) the Barclays Capital Aggregate Bond Index. B) the S&P 500. C) the Dow Jones Industrial Average. D) the Value Line Index.

Answer: A Because a growth fund portfolio consists mainly of common stock, comparing the fund's performance against a bond index is obviously misleading. Reference: 7.8 in the License Exam Manual.

Your client is considering the purchase of a small-cap fund. Which of the following benchmarks would be most appropriate for comparing the fund's performance? A) S&P 500. B) Russell 2,000. C) DJIA. D) Wilshire 5,000.

Answer: B The Russell 2,000 is a value-weighted index of stock price performance of 2,000 small capitalization corporations. Reference: 7.8 in the License Exam Manual.

Portfolio managers frequently measure their performance against a recognized index. However, performance would NOT be compared against which of the following? A) S&P 400. B) S&P 500. C) Nasdaq 100. D) S&P 2000.

Answer: D There is no such index as the S&P 2000. Reference: 7.8 in the License Exam Manual.

An investment advisory firm tracks its performance against the S&P 400. From this, you could determine that this firm concentrates on A) mid-cap securities B) large-cap securities C) Nasdaq securities D) small-cap securities

Answer: A The S&P 400 is known as the mid-cap index. Reference: 7.8 in the License Exam Manual.

To assess the performance of a small cap stock fund you compare its results against the: A) Russell 2000. B) Dow Jones Industrial Average. C) S&P 100. D) S&P 500.

Answer: A The appropriate benchmark for a small cap fund is the Russell 2000 because it is comprised of similar companies. Reference: 7.8 in the License Exam Manual.

Under modern portfolio theory (MPT), the optimal portfolio has: A) the most return for the most amount of risk. B) no risk for a given amount of return. C) the most return for a given amount of risk. D) the least return for a given amount of risk.

Answer: C Under modern portfolio theory (MPT), the optimal portfolio is one that has the most return for a given amount of risk. Reference: 7.8.1 in the License Exam Manual.

If an agent recommends that a client invest a portion of his portfolio in an international stock fund and is asked whether she should compare the performance of the fund against the S&P 500 Index, how should the agent respond? A) No, it is preferable to compare the fund against the Russell 2,000 Index because it covers smaller corporation stocks. B) There is no appropriate benchmark against which an investor can compare a portfolio of foreign securities. C) No, it is preferable to compare the fund against the Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index because it covers international securities. D) Yes, the S&P 500 is an appropriate benchmark against which to compare the performance of all equity funds.

Answer: C It is important that a particular mutual fund be compared against the appropriate benchmark. An international fund's performance should be compared against an index of foreign stocks such as the Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index. Reference: 7.8 in the License Exam Manual.

The concept of creating a model portfolio, through asset allocation principles, that both increases return and reduces risk is known as: A) risk reduction fundamentals. B) corrective adaptation. C) portfolio optimization. D) rebalancing.

Answer: C One of the primary concepts of asset allocation is that the performance of a portfolio can be enhanced while also reducing the associated risk. This is accomplished through a proper allocation of assets, among many different asset categories, to establish a portfolio suitable for the investor's risk tolerance and desired performance. This model portfolio would lie on the efficient frontier, thus representing the optimal portfolio for the client-maximum return with the least risk. Reference: 7.8.1 in the License Exam Manual.

An efficient portfolio is one that offers: I.the most return for a given amount of risk. II.the least risk for a given amount of return. III.the least return for a given amount of risk. IV.the most risk for a given amount of return. A) I or III B) II or IV C) III or IV D) I or II

Answer: D Under modern portfolio theory, (MPT), we look to assemble the efficient set, or efficient frontier. This is a collection of efficient portfolios. Portfolio efficiency is found when we can obtain the most return for a given amount of risk, or stated in the reverse, the least risk for a given amount of return. Reference: 7.8.1.1 in the License Exam Manual.