Deck 21: Portfolio Management

Question 1

Maginn and Tuttle emphasize that portfolio management is:

A) only applicable to an active approach in selecting and holding financial assets.
B) an ad hoc process matching investors with portfolio basis, one by one.
C) a process integrating a set of activities in a logical and orderly manner.
D) a process that is sporadic and unsystematic based on changes in market conditions.

Answer 1

a process integrating a set of activities in a logical and orderly manner.

Question 2

The first step of portfolio management according to Maginn and Tuttle is:

A) to assess economic and market conditions to determine the relative asset mix.
B) to determine objectives, constraints and preferences in order to lead to explicit investment policies.
C) to develop strategies and implement them through the choice of the optimal combinations of assets.
D) to adjust the portfolio to reflect significant changes that have occurred.

Answer 2

to determine objectives, constraints and preferences in order to lead to explicit investment policies.

Question 3

A major difference between individual and institutional investors is that:

A) individuals have short-term time horizons with institutions long-term.
B) institutions, such as pension funds, are greatly influenced by tax considerations .
C) individuals think in terms of a life cycle with institutions maintaining a relatively constant profile across time.
D) the various types of securities held in their respective portfolios.

Answer 3

individuals think in terms of a life cycle with institutions maintaining a relatively constant profile across time.

Question 4

Which of the following statements regarding individual and institutional investors is true?

A) Taxes are generally more important to institutional investors than to individual investors.
B) Institutional investors tend to be less precise about their assets and liabilities than individual investors.
C) Individuals generally have greater freedom in their investment decisions than do institutional investors.
D) Institutional investors are more defined by their personalities than are individual investors.

Question 5

Which of the following is not a major constraint in the asset allocation process?

A) liquidity
B) taxes
C) return requirements
D) laws and regulations

Question 6

The life-cycle theory of asset allocation proposes that as investors progress through life, their:

A) asset allocation should change to meet changing needs.
B) earnings increase in their 20s, reach a peak at about age 45, then decline.
C) assets must grow geometrically in order to achieve reasonable goals.
D) asset allocation should remain fixed in order to avoid short-sighted adjustments.

Question 7

The phase where an investor covers living expenses from accumulated assets rather than earned income is the:

A) accumulation phase.
B) consolidation phase.
C) spending phase.
D) gifting phase.

Question 8

In considering inflation in a portfolio management context which of the following statements is true?

A) An investment policy statement seldom contains statements about inflation-adjusted returns.
B) Common stocks do not always provide an inflation hedge.
C) At a 3 percent inflation rate the purchasing power of a dollar will double in less than 25 years.
D) To preserve purchasing power investors ignore growth-oriented mix strategies.

Question 9

The two steps to establishing an investment policy are to state the:

A) minimum investment and maximum fees.
B) SEC guidelines for prudent man investing.
C) objectives and constraints.
D) asset allocation parameters and time horizons.

Question 10

Which of the following is not one of the phases of the life-cycle theory of asset allocation?

A) Accumulation phase
B) Consolidation phase
C) Taxation phase
D) Gifting phase

Question 11

Which of the following is not a usual constraint and preference considered in formulating an investment policy?

A) Philanthropy requirements
B) Legal and regulatory requirements
C) Tax considerations
D) Time horizon

Question 12

One aspect of the tax considerations in asset allocation is that:

A) dividends and capital gains are taxed at a higher rate than interest income.
B) tax laws in Canada are constantly changing making it difficult to forecast future tax rates.
C) investors must pay capital gains on an accrual basis.
D) retirement programs can no longer offer tax sheltering with capital gains and income taxed as ordinary income.

Question 13

An integrated asset allocation strategy involves:

A) adhering to a long-term mix by rebalancing the portfolio as necessary.
B) an all encompassing strategy that examines market conditions and investor objectives and constraints.
C) moderately active asset allocation approach to deviate from long-term strategies to take advantage of market timing skills.
D) timing passive investment strategy with extensive indexing of the portfolio.

Question 14

Strategic asset allocation involves:

A) market timing.
B) simulation to identify a range of outcomes for various asset mixes.
C) the life-cycle concept.
D) individual investors only.

Question 15

Which type of portfolio allocation is usually done once every few years?

A) integrated asset allocation
B) strategic asset allocation
C) tactical asset allocation
D) command asset allocation

Question 16

Which of the following statements regarding inflation and investing is true?

A) Futures are the best hedge against inflation.
B) Inflation is not a problem in a buy-and-hold strategy.
C) Common stock is not always a hedge against inflation.
D) All of the above statements are true.

Question 17

In which stage of the life cycle can investors afford to take larger risks?

A) Accumulation stage
B) Consolidation stage
C) Spending stage
D) Gifting stage

Question 18

Investors in the later stages of lives would likely hold more large-cap stocks than cash and bonds combined.

Question 19

Both institutional investors and individual investors have to consider taxes equally in making investment decisions.

Question 20

The Prudent Man Rule, which applies to fiduciaries, is a comparatively old concept in investment management.

Question 21

Monitoring and revision are not a part of the Maginn and Tuttle portfolio management process.

Question 22

Aggressive investors are more likely to have international stocks than conservative investors.

Question 23

An efficient set of portfolios offers minimum risk for a given level of return.

Question 24

Under the life cycle approach, the lowest risk and lowest return should come during the consolidation phase.

Question 25

At the present time, capital gains are taxed at a higher rate than interest income.

Question 26

The liquidity needs constraint to asset allocation addresses the question of long-run needs for cash.

Question 27

Pension funds are governed by the Prudent Man Rule since specific pension fund legislation has not been enacted by government.

Question 28

When rebalancing a portfolio, the costs of trading must be addressed but the costs of not trading must be avoided.

Question 29

Tactical asset allocation is essentially a market timing approach to portfolio management.

Question 30

Discuss the four-step portfolio management process outlined by Maginn and Tuttle.

Question 31

What are the two steps in the portfolio construction process?

Question 32

How do the constraints for individual investors compare to those of institutional investors?

Question 33

What are the two steps to forming an investment policy?

Question 34

What are some of the tax questions to be considered in investment policy?

Question 35

Explain the life cycle theory of asset allocation.