PORTFOLIO MANAGEMENT: AN OVERVIEW

SOLUTIONS

1. A is right. Combining property right into a portfolio ought to scale back the portfolio’s volatility. Particularly, “people and establishments ought to maintain portfolios to cut back danger.” As illustrated within the studying, nonetheless, danger discount might not be as nice throughout a interval of dramatic financial change.
2. A is right. Combining property right into a portfolio ought to scale back the portfolio’s volatility. The portfolio strategy doesn’t essentially present draw back safety or assure that the portfolio all the time will keep away from losses.
3. B is right. As illustrated within the studying, portfolios scale back danger greater than they improve returns.
4. A is right. The surplus reserves invested by banks must be comparatively liquid. Though funding corporations and non-life insurance coverage corporations have excessive liquidity wants, the liquidity want for banks is on common the best.
5. B is right. Most foundations and endowments are established with the intent of getting perpetual lives. Though outlined profit plans and life insurance coverage corporations have portfolios with a very long time horizon, they aren’t perpetual.
6. A is right. Revenue is critical to fulfill the money circulation obligation to retirees. Though outlined profit plans have a necessity for revenue, the necessity for liquidity sometimes is sort of low. A retiree may have life insurance coverage; nonetheless, an outlined profit plan doesn’t want insurance coverage.
7. B is right. Funding corporations handle investments in mutual funds. Though endowments and insurance coverage corporations might personal mutual funds, they don’t concern or redeem shares of mutual funds.
8. C is right. The shopper’s goals and constraints are established within the funding coverage assertion and are used to find out the shopper’s goal asset allocation, which happens within the execution step of the portfolio administration course of.
9. A is right. Securities are analyzed within the execution step. Within the planning step, a shopper’s goals and constraints are used to develop the funding coverage assertion.
10. Portfolio monitoring and rebalancing happens within the suggestions step of the portfolio administration course of.

C is right. Portfolio 3 has the identical fairness publicity as Portfolio 1 and has the next publicity to different property, which have larger

1. volatility (as mentioned within the readings evaluating the endowments from Yale College and the College of Virginia).
2. B is right. Open-end funds commerce at their internet asset worth per share, whereas closed-end funds and exchange-traded funds can commerce at a premium or a reduction.
3. A is right. Trade-traded funds should not have capital achieve distributions. If an investor sells shares of an ETF (or open-end mutual fund or closed-end mutual fund), the investor might have a capital achieve or loss on the shares bought; nonetheless, the achieve (or loss) from the sale will not be a distribution.
4. A is right. Hedge funds are at the moment exempt from the reporting necessities of a typical public funding firm.
5. B is right. Buyout funds or non-public fairness corporations make just a few massive investments in non-public corporations with the intent of promoting the restructured corporations in three to 5 years. Enterprise capital funds even have a short while horizon; nonetheless, these funds include many small investments in corporations with the expectation that just a few could have a big payoff (and that almost all will fail).