Deck 21: All Investors Must Consider Portfolio Management

Question 1

Conservative retirees likely have ____ than they did early in their careers.

A) more small-cap stocks
B) more international stocks
C) fewer bonds
D) more bonds

Answer 1

D

Question 2

__________ is the most important investment decision because it determines the risk-return characteristics of the portfolio and determines as much as 98% of the performance of a portfolio.

A) Hedging
B) Market timing
C) Performance measurement
D) Asset allocation

Answer 2

D

Question 3

The first step to establishing an investment policy is to state the

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

Answer 3

C

Question 4

An aggressive asset allocation would contain larger proportions of __________ than a conservative allocation.

A) cash and bonds
B) bonds and large-cap stocks
C) small-cap and international stocks
D) bonds

Question 5

In order to protect principal against possible loss caused by distressed selling, individuals are typically recommended to have a

A) 1-month emergency fund.
B) 2-month emergency fund.
C) 6-month emergency fund.
D) 9-month emergency fund

Question 6

Which of the following is not among the usual constraints and preferences considered when formulating an investment policy?

A) Avoidance of so-called "sin" stocks (alcohol, tobacco, firearms, etc.)
B) Liquidity needs
C) Economic assessment
D) Time horizon

Question 7

The annual average compound rate of return for stocks from the period 1926-2007 was:

A) 8.50%
B) 9.55%
C) 10.05%
D) 12%

Question 8

Which of the following is NOT part of the portfolio management process, as described by Maginn, Tuttle, McLeavy, and Pinto (2007)?

A) portfolio factors are monitored.
B) portfolio is rebalanced.
C) portfolio is rebalanced as required.
D) strategies are developed and implemented.

Question 9

Portfolio objectives are always going to center on _______and_______, because these are the two aspects of most interest to investors.

A) accumulation; consolidation.
B) return; taxes.
C) return; risk.
D) spending; gifting.

Question 10

One aspect of the tax considerations in asset allocation is that

A) capital gains are often taxed at a higher rate than income.
B) current income is seldom a significant consideration for an investor in the spending phase of the life cycle.
C) investors are exempt from taxes on capital gains once they reach age 65.
D) taxes on capital gains are deferred until the gain is realized.

Question 11

Living expenses are covered from accumulated assets rather than from earned income in the __________ phase of the life cycle.

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

Question 12

Which of the following is NOT a major consideration in the asset allocation process?

A) Return requirements
B) Risk tolerance
C) Ease of monitoring progress
D) Time horizon

Question 13

A financial plan should include decisions on:

A) Children.
B) Spouse.
C) Risk tolerance, purchase of a house, tax planning, life, health, disability, and protection of business and property insurance, and emergency reserve funds.
D) Career.

Question 14

Which of the following is not true regarding life-cycle approach?

A) It is most appropriate for institutions. .
B) It automatically adjusts to a more conservative position as the investor nears retirement age.
C) It is suited to 401(k) plans.
D) It can be implemented using life-cycle (also known as target-date) funds.

Question 15

The stages of the life cycle for setting individual investment objectives are:

A) Accumulation Phase, Consolidation Phase, Retirement Phase, Estate Phase.
B) Accumulation Phase, Consolidation Phase, Retirement Phase, Gifting Phase.
C) Accumulation Phase, Consolidation Phase, Spending Phase, Retirement Phase, Gifting Phase.
D) Accumulation Phase, Consolidation Phase, Spending Phase, Gifting Phase.

Question 16

The first step of portfolio management according to Maginn et al. (2007) is :

A) to assess market conditions.
B) to determine objectives, constraints and preferences.
C) to develop strategies and implement them.
D) to adjust the portfolio as necessary.

Question 17

Investors normally assume a trade-off between risk and return in the ____ phase of the life-cycle.

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

Question 18

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) Gifting phase
D) Retirement phase

Question 19

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

A) asset allocation will tend to become more conservative.
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 20

_____ governs employer-sponsored retirement plans.:

A) Investors Advisors Act.
B) Investment Company Act.
C) Security Investors Protection Act.
D) Employment Retirement Income Security Act.

Question 21

Retirees would likely have a greater percentage of their wealth in common stock than would a recent college graduate.

Question 22

A market timing approach that increases the proportion of funds in stocks when the stock market is expected to be rising, and increases cash when the stock market is expected to be falling is a:

A) strategic asset allocation.
B) tactical asset allocation.
C) portfolio optimization.
D) liquidity expectation timing.

Question 23

Common stocks are not always an inflationary hedge, but have a long history of strong performance over time.

Question 24

The "lockup" problem involved in rebalancing refers to the:

A) problem that investors face in retirement accounts that cannot be liquidated prior to retirement.
B) trust accounts that are not managed by the investor and cannot be traded without incurring administrative costs.
C) taxable accounts subject to capital gains taxes if investments are traded.
D) problem of fixed-income securities that have little liquidity and therefore, must be held till maturity.

Question 25

In order to arrive at an investment policy, it is necessary to determine whether the market is headed for a bull or bear market.

Question 26

Pension funds are governed by the prudent man rule since specific pension fund legislation has never passed.

Question 27

Which type of portfolio allocation is usually done routinely?

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

Question 28

Retirement programs offer tax sheltering for individual U.S. investors.

Question 29

Investor expectations about expected returns from various asset classes should start with:

A) historic rates of return of those asset classes, from sources such as Morningstar/Ibbotson & Associates.
B) economic forecasts
C) inflation.
D) taxes.

Question 30

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

Question 31

To avoid problems of underperformance, passive investing through the use of indexed mutual funds and ETFs is generally the way to go for most individuals.

Question 32

Financial plans should be monitored and updated on an ongoing basis. Examples of changes that can necessitate financial plan updating include changes in wealth, time horizon, liquidity requirements, tax circumstances, and regulations.

Question 33

Strategic asset allocation is usually done:

A) once every few years, establishing a long-run or strategic asset mix.
B) using Monte Carlo simulation to identify a range of outcomes for various asset mixes.
C) the life-cycle concept.
D) a market timing strategy.

Question 34

Under the life cycle approach, the lowest risk and lowest return should come during the spending and gifting stages.

Question 35

The consolidation phase of the life cycle begins when the investor reaches retirement.

Question 36

Monitoring and rebalancing a portfolio over time involves all of the following costs EXCEPT

A) commissions.
B) possible impact on market price.
C) holding a portfolio that is no longer adequately diversified.
D) time involved in decision making.

Question 37

The geometric mean for the S&P 500 for the period 1920-2005 was between 15 and 20 percent.

Question 38

The Markowitz model identifies the efficient set of portfolios, which offers the

A) highest return for any given level of risk or the lowest risk for any given level of return.
B) least-risk portfolio for a conservative, middle-aged investor.
C) long-run approach to wealth accumulation for a young investor.
D) risk-free alternative for risk-averse investors.

Question 39

An efficient set of portfolios offers maximum risk for any level of return.

Question 40

Monitoring and revision are part of the Maginn et al. (2007) portfolio management process.

Question 41

Explain the life-cycle theory of portfolio policies.

Question 42

Give an example of how individual investors' preferences are taken into account by institutional investors?

Question 43

The spending phase of the life cycle is avoided by investors who follow the prudent man rule.

Question 44

Rebalancing is for many investors because it represents a contrarian strategy.

Question 45

What are some of the differences between individual investors and institutional investors?

Question 46

What is difference between strategic asset allocation and tactical asset allocation?

Question 47

Mr. Baker, a single person in early retirement, owns a house, a well-used car, and minimal life insurance. He has pension assets of about half a million dollars. He wants it all in tax-exempt municipal bonds so that "I won't lose any money, and I won't have to pay taxes." Considering the life-cycle theory of asset allocation, would you suggest any alternatives to this client?

Question 48

How does the prudent man rule affect asset allocation?

Question 49

What is the portfolio management process outlined by Maginn and Tuttle.

Question 50

Portfolio performance evaluation is an important determinant of your success in financial planning.

Question 51

In today's world, investor's time horizons have lengthened.