Ch 17 - Investment Management

Question 1

three key steps of a systematic approach to investment management

Answer 1

1. Formulate an asset allocation strategy.
2. Select securities to implement the strategy.
3. Monitor and evaluate the portfolio regularly.

Question 2

three components of asset allocation Strategy

Answer 2

Strategic asset allocation
Rebalancing
Tactical asset allocation

Question 3

Factors to consider to invest in securities or managed products

Answer 3

1. The dollar value of the portfolio and the need for diversification
2. The client’s willingness to invest in individual securities
3. The client’s previous experience with individual securities
4. The client’s need to control the timing of taxable transactions
5. The advisor’s access to timely, accurate
   research on individual securities

Question 4

What does the correlation coefficient measure?

Answer 4

the strength of the relationship between two security’s return

Question 5

what is an efficient portfolio

Answer 5

Gives maximum expected return for a given level of risk;

or minimum risk for given expected return

Question 6

mean-variance optimization, four assumptions:

Answer 6

1. All investors are risk-averse
2. Investors have access to information on expected returns, standard deviations, and correlation of all assets
3. Investors build their portfolios using only the expected returns, standard deviations, and correlation of assets.
4. There are no transaction costs or taxes.

Question 7

what does the portfolio opportunity set represent?

Answer 7

risk-return trade-off between stocks and bonds given their expected returns, standard deviations, and correlation.

Question 8

minimum variance frontier

Answer 8

set of portfolios with the lowest possible risk for a given level of expected return

Question 9

efficient frontier

Answer 9

upper part of the minimum variance frontier,

Question 10

coefficient of determination measures

Answer 10

the relationship between the return on the security or portfolio and the return on the market index

Question 11

DISADVANTAGES of international investing (6)

Answer 11

• Higher expenses
• Liquidity risk
• Poor shareholder communications
• Foreign exchange risk
• Sovereign risk
• Different legal and accounting bases

Question 12

4 SKILLS NECESSARY FOR EFFECTIVE INVESTING IN FOREIGN MARKETS

Answer 12

• Knowledge of asset allocation tools
• Sensitivity to additional costs and expenses
• Familiarity with foreign trading and settlement conventions
• Sensitivity to the volatility levels of international markets