IAR Portfolio Management

Question 1

According to Modern Portfolio Theory (MPT), what is the primary benefit of diversification?

Accepted Answer

It reduces unsystematic risk without proportionally reducing expected return

Answer

It eliminates all investment risk from a portfolio

Answer

It guarantees returns above the risk-free rate

Answer

It increases the beta of the overall portfolio

Question 2

The efficient frontier in Modern Portfolio Theory represents portfolios that:

Accepted Answer

Maximize expected return for a given level of risk

Answer

Offer the highest possible return regardless of risk

Answer

Have zero systematic risk

Answer

Are guaranteed to outperform the market index

Question 3

An investment adviser is determining strategic asset allocation for a client. Which factor is MOST important in this decision?

Accepted Answer

The client's investment time horizon and risk tolerance

Answer

Current market valuations of equity indices

Answer

The historical performance of individual securities

Answer

Short-term interest rate forecasts

Question 4

Which of the following BEST describes systematic risk?

Accepted Answer

Market-wide risk that affects all securities and cannot be diversified away

Answer

Risk specific to a single company that can be eliminated through diversification

Answer

Risk arising from poor internal controls within a firm

Answer

The risk that a bond issuer will default on its obligations

Question 5

A portfolio has a beta of 1.4. If the market rises 10%, what is the expected portfolio return based on beta alone?

Accepted Answer

14%

Answer

10%

Answer

1.4%

Answer

8.6%

Question 6

What does the Sharpe ratio measure?

Accepted Answer

Excess return per unit of total risk (standard deviation)

Answer

A portfolio's total return relative to its benchmark

Answer

Excess return per unit of systematic risk (beta)

Answer

The correlation between a portfolio and the market index

Question 7

An adviser rebalances a client's portfolio back to its target allocation annually. What is the PRIMARY purpose of rebalancing?

Accepted Answer

To restore the intended risk-return profile that market drift has altered

Answer

To increase the portfolio's expected return each year

Answer

To minimize capital gains taxes on appreciated positions

Answer

To replace underperforming managers with better ones