Deck 3: Setting Portfolio Objectives

Question 1

Two dominant factors contributing to a successful investment program are

A) suitable investment objectives and policy, and successful managers
B) suitable investment objectives and risk assessment
C) successful managers and successful income generation
D) accurate risk assessment and measurement of historical return

Answer 1

suitable investment objectives and policy, and successful managers

Question 2

To an investment professional, which of the following provides no growth?

A) Real estate
B) Savings accounts
C) Common stock
D) Corporate bonds

Answer 2

Savings accounts

Question 3

With bequests, a semantic problem sometimes develops with regard to the meaning of the terms

A) growth and income
B) principal and interest
C) risk and return
D) present value and future value

Answer 3

principal and interest

Question 4

A good example of the issue of multiple portfolio beneficiaries is found in people

A) who want income and those who want growth
B) who are risk averse and those who are not
C) who pay taxes and those who do not
D) today and people tomorrow

Question 5

Which of the following deals with decisions that have been made about long-term investment activities, eligible investment categories, and the allocation of funds among the eligible investment categories?

A) Investment policy
B) Investment strategy
C) Investment tactics
D) Investment standards

Question 6

All of the following are principal portfolio objectives EXCEPT

A) stability of principal
B) capital appreciation
C) growth and income
D) income

Question 7

If someone wants no chance of a loss of principal value, the appropriate primary objective is

A) stability of principal
B) income
C) growth of income
D) capital appreciation

Question 8

If someone is concerned about inflation eroding purchasing power of regular income, the appropriate primary objective is

A) stability of principal
B) income
C) growth of income
D) capital appreciation

Question 9

A young, well-paid professional is best suited, on average, to which primary objective?

A) Stability of principal
B) Income
C) Growth of income
D) Capital appreciation

Question 10

In the early years, which primary objective generally results in the least income?

A) Stability of principal
B) Income
C) Growth of income
D) Capital appreciation

Question 11

A growth-of-income objective

A) sacrifices some current return for some purchasing power protection
B) generates maximum income as soon as possible
C) makes only sparing use of equity securities
D) generates income that declines over time

Question 12

Tax-free income can be earned by investing in

A) corporate bonds
B) municipal bonds
C) treasury bonds
D) common stock

Question 13

All investors seek to

A) maximize their expected return
B) minimize their risk exposure
C) maximize their expected utility
D) minimize the number of their capital losses

Question 14

Some people do not like mutual funds because they

A) have no tax advantages
B) are not exciting
C) offer less potential return than that available in securities
D) are too risky

Question 15

Establishing a secondary objective helps the portfolio manager

A) learn more about the client's tax situation
B) learn more about the client's expected utility of investment
C) determine the appropriate level of risk for the customer
D) determine the necessary level of equity investment

Question 16

Which of the following primary/secondary objective combinations is infeasible?

A) Stability of principal, income
B) Income, stability of principal
C) Growth of income, stability of principal
D) Capital appreciation, growth of income

Question 17

Which of the following primary/secondary objective combinations is infeasible?

A) Stability of principal, growth of income
B) Income, growth of income
C) Growth of income, capital appreciation
D) Income, capital appreciation

Question 18

Which of the following primary/secondary objective combinations is infrequent?

A) Stability of principal, growth of income
B) Income, capital appreciation
C) Growth of income, capital appreciation
D) Growth of income, stability of principal

Question 19

A disadvantage of portfolio splitting is that it

A) enables overseers to avoid making tough decisions
B) reduces current income
C) reduces the potential for capital appreciation
D) sacrifices liquidity

Question 20

A common third category of investment (in addition to bonds and stock) is

A) cash equivalents
B) municipal securities
C) American depository receipts
D) repurchase agreements

Question 21

Another name for portfolio dedication is

A) liability funding
B) technical analysis
C) fundamental analysis
D) strategic investment

Question 22

Cash matching involves assembling a portfolio such that it

A) has the duration desired
B) has a cash flow stream that matches the requirements of a liability stream
C) optimizes the risk/return combination
D) is informationally efficient

Question 23

Principal concerns in duration matching are the

A) present value of the outflows and their duration
B) future value of the outflows and their duration
C) annuity value of the outflows
D) certainty equivalent of the outflows and the present value of its duration

Question 24

To reduce the duration of a bond portfolio, managers often use

A) shares of common stock
B) hard asset investments
C) preferred stock shares
D) treasury bills

Question 25

The first mutual fund was founded in

A) 1776
B) 1815
C) 1924
D) 1957

Question 26

The approximate number of mutual funds in the United States is

A) 100
B) 1,000
C) 10,000
D) 30,000

Question 27

Which of the following trades on a stock exchange?

A) A closed-end fund
B) An open-end fund
C) Any mutual fund
D) Any investment company

Question 28

For an open-end mutual fund

A) net asset value < market value
B) net asset value > market value
C) net asset value = market value
D) net asset value is greater than or equal to market value

Question 29

If you buy shares in a load fund, you will pay

A) net asset value
B) less than net asset value
C) more than net asset value
D) cannot be determined

Question 30

Before buying mutual fund shares, prospective investors must receive a

A) prospectus
B) indenture
C) debenture
D) hypothecation agreement

Question 31

The portfolio objective with the highest risk is

A) stability of principal
B) capital appreciation
C) income
D) growth of income

Question 32

A client's need for liquidity might best be addressed by

A) investing in growth industry stocks
B) investing in real estate
C) increasing the proportion of bonds in the portfolio
D) investing a portion of the portfolio in assets with checkwriting privileges

Question 33

Money market mutual funds are sometimes added in a portfolio to

A) reduce the duration
B) increase the duration
C) move from an income objective to a growth in income objective
D) decrease the short-term tax consequences

Question 34

An objective to lower the short-term taxes for a client might be addressed by including

A) stocks in the utilities industry
B) short-term U.S. Treasury securities
C) long-term U.S. Treasury securities
D) municipal bonds

Question 35

A no-load mutual fund means there are no

A) management fees
B) 12 b-1 fees
C) selling fees
D) stocks that pay dividends in this mutual fund

Question 36

A redemption fee is a cost to the

A) manager of a mutual fund to pay for poor investment decisions
B) manager of a mutual fund when he resigns
C) investor of a mutual fund on the sale of shares
D) investor of a mutual fund when performance is poor

Question 37

A mutual fund prospectus provides

A) a forecast of future fund performance
B) a forecast of the macroeconomy over the next year
C) a forecast of the expected tax consequences over the next year
D) provides the fund's purpose and intended investment activity

Question 38

The majority of mutual funds can be classified as

A) stock funds
B) taxable bond funds
C) municipal bond funds
D) money market funds

Question 39

Which of the following deal with decisions that have been made about long-term decisions?

A) Investment constraints
B) Fiduciary interest
C) Investment strategy
D) Investment policy