An active portfolio manager faces a trade-off betweenI) 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
E) II and III

Question

Quizplus · Accepted Answer

III and V are correct because exploiting perceived security mispricings and letting a few stocks dominate the portfolio are trade-offs an active portfolio manager faces. The manager aims to outperform the market by identifying mispriced securities, but concentrating too much on a few stocks can increase risk.

An Active Portfolio Manager Faces a Trade-Off BetweenI) Using the Sharpe