Portfolio Management MCQ - Portfolio Management Section 2

21 Which of the following factors is least likely to impact the risk-taking ability of a client?

An individual‟s ability to take risk is impacted by such factors as time horizon and expected income. Personality type is most likely to impact an individual‟s willingness to take risk.

22 A financial advisor gathers the following information about a new client: The client is a famous physics professor at biggest universities in New York. The client owns a penthouse and two cars with currently zero outstanding debt. The client is currently working full-time and plans to continue this way for another five years after which he will work part time for 4 years before retirement. The client has accumulated retirement savings of approximately $1.75 million through their employer’s retirement plan and anticipates retirement spending needs of $80,000 per year. Despite the concern regarding the current condition of the global economy, the client maintains to remain a long-term investor. The client follows numerous financial publications closely and is aware of the evolving markets. Based on the above information, which of the following best describes this client?

The client is in a strong financial situation (stable job, no debt), has a reasonably long time horizon before needing any liquidity (10 years), and reasonable retirement spending needs relative to total assets. These factors indicate a high ability to take risk. In addition, the client‟s knowledge of financial markets, experience, and focus on the long term also indicates a high willingness to take risk.

23 After interviewing a client in order to prepare a written investment policy statement (IPS), you have established the following:

-The client has earnings that have exceeded $150,000 (pre-tax) each year for the past four years and has no dependents. The client’s basic needs are approximately $49,500 per year.
-The client states that he feels particularly uncomfortable with his limited understanding of securities markets.
-All of the client’s current savings are invested in short-term securities guaranteed by an agency of her national government. The client responded to a standard risk assessment questionnaire suggesting that he has low risk tolerance.

The client is best described as having a:

On one hand, the client has a stable, high income and no dependents. On the other hand, he exhibits above average risk aversion. His ability to take risk is high, but his willingness to take risk is low.

24 Which of the following factors is most likely to impact an individual's willingness to take risk?

An individual‟s willingness to take risk is impacted by factors as personality type. Wealth and time horizon are most likely to impact an individual‟s ability to take risk.

25 An investment manager in an asset management company is in the process of defining asset classes. Which of the following activities would be most appropriate considering the paired correlations of assets?

When defining asset classes, paired correlations of assets should be relatively high within an asset class. However, paired correlations of assets between different asset classes should be low in order to provide diversification relative to other asset classes.