Portfolio Management MCQ - Portfolio Management Section 2

6 Brad, an investor, has a portfolio which is not fully diversified. Which performance measure is most appropriate for Brad?

Since the portfolio is not fully diversified, a measure based on total risk (M-Squared) is more appropriate relative to measures based on systematic risk (Jensen’s alpha and Treynor ratio).

7 The following information is provided about a stock market index m and security i:

Statistic	Value
Covariance between market return and security return [Cov(Ri, Rm)]	0.01208
Correlation coefficient between market return and security return (ρi,m)	0.35
Standard deviation of market return (σm)	0.15

The beta of security i, βi, is closest to:

The beta of security i is calculated as: βi = Cov(Ri, Rm)/σm2 = 0.01208/(0.15)2 = 0.54.

8 Two stocks, A and B, have same total risk. Stock A has twice the systematic risk of stock B and half its unsystematic risk. Stock B’s expected return will most likely be:

The less the systematic risk of a stock, the less is its expected return.Therefore, stock B will have a lower expected return than stock A.

9 Analyst 1: A written IPS is part of the best practices for a portfolio manager. Analyst 2: A written IPS ensures the client’s risk and return objectives can be achieved. Which analyst’s statement is most likely correct?

The mere fact that a written IPS is prepared for a client, does not ensure that risk and return objectives will in fact be achieved.

10 Which of the following is the most appropriate reason for a written investment policy statement? A written IPS:

A written IPS is best seen as a communication instrument allowing clients and portfolio managers to mutually establish investment objectives and constraints.