Portfolio Management

Question 1

Define the optimal portfolio

Answer 1

The optimal portfolio is identified as the point at which the capital allocation line (CAL) is tangential to the investor’s indifference curve. As investor risk aversion increases, the optimal portfolio slides down the CAL to a point of lower expected risk and lower expected return.

Question 2

With respect to the portfolio management process, the execution step most likely includes

Answer 2

Asset allocation

Security analysis - top down bottom up

Portfolio construction

Question 3

Jensen’s alpha

Answer 3

= Portfolio return - CAPM

Difference between a PMs return and the CAPM return

Question 4

With respect to the portfolio management process, the planning step most likely includes

Answer 4

Understanding the client’s needs

Preparation of an investment policy statement (IPS)

Question 5

The strategic asset allocation and portfolio rebalancing policy are most likely addressed in which section of an investment policy statement?

Answer 5

appendix

Question 6

With respect to the portfolio management process, the feedback step most likely includes

Answer 6

Portfolio monitoring and rebalancing

Performance measurement and reporting

Question 7

The Treynor ratio

Answer 7

= (Rp - Rf) / Beta of portfolio

The Treynor ratio measures the return premium of a portfolio versus the risk-free asset relative to the portfolio’s beta, which is a measure of systematic risk.

Question 8

Sharpe Ratio

Answer 8

(Portfolio Return - Risk Free) / standard deviation

The portfolio with the highest Sharpe ratio has the best performance, provided that the numerator is positive for all comparison portfolios.

If the numerator is negative, the ratio will be less negative for riskier portfolios,

Question 9

Risk Objectives - Relative vs Absolute

Answer 9

Examples of an absolute risk objective would be a desire not to suffer any loss of capital or not to lose more than a given percent of capital in any 12-month period.

relative risk objectives, which relate risk relative to one or more benchmarks perceived to represent appropriate risk standards.

Question 10

Relative Strength Analysis

Answer 10

used to compare the perfomance of a particular asset (i.e. common stock) to some benchmark.

he intent is to show out- or underperformance of the individual issue relative to some other index or asset. Typically, the analyst prepares a line chart of the ratio of two prices. A rising line shows the asset is performing better than the index or other stock; a declining line shows the opposite. A flat line shows neutral performance.