An active portfolio manager faces a trade-off between I) using the Sharpe measure.
II. using mean-variance analysis.
III. exploiting perceived security mispricings.
IV. holding too much of the risk-free asset.
V. letting a few stocks dominate the portfolio.
A)I and II
B)II and V
C)III and V
D)III and IV

Question

Quizplus · Accepted Answer

Exploiting perceived security mispricings involves active management and may lead to higher returns. Allowing a few stocks to dominate the portfolio increases concentration risk and may also lead to higher returns, but the risk is much higher. Using mean-variance analysis and the Sharpe measure are important but should not be the only factors considered in portfolio management. Holding too much of the risk-free asset is not an issue for an active portfolio manager since the goal is to achieve higher returns.

An Active Portfolio Manager Faces a Trade-Off Between I) Using