Series 65 – Uniform Investment Adviser Law Exam Portfolio Management and Analysis 2 — Questions and Answers
Question 1: What is the difference between technical analysis and fundamental analysis?
- Technical analysis uses financial statements; fundamental analysis uses price charts
- Technical analysis uses price and volume data to forecast future prices; fundamental analysis evaluates a company's financial health and intrinsic value (Correct answer)
- Technical analysis is used for bonds; fundamental analysis is used for stocks
- There is no meaningful difference between the two approaches
Correct answer: Technical analysis uses price and volume data to forecast future prices; fundamental analysis evaluates a company's financial health and intrinsic value
Technical analysts study historical price and volume patterns to predict future price movements, while fundamental analysts evaluate financial statements, management, and economic factors to determine intrinsic value.
Question 2: What is the time-weighted rate of return (TWR) designed to measure?
- The total dollar gain of a portfolio over a period
- The compound growth rate of a portfolio that eliminates the distorting effects of client cash flows (Correct answer)
- The return earned on the most recent investment made
- The average return across all accounts managed by an adviser
Correct answer: The compound growth rate of a portfolio that eliminates the distorting effects of client cash flows
TWR measures the compound growth of an investment by eliminating the impact of client deposits and withdrawals, making it useful for evaluating a manager's pure investment performance.
Question 3: What is the difference between systematic and unsystematic risk?
- Systematic risk is company-specific; unsystematic risk is market-wide
- Systematic risk affects the entire market and cannot be diversified away; unsystematic risk is specific to individual companies and can be reduced through diversification (Correct answer)
- Systematic risk is only relevant for bonds; unsystematic risk applies only to stocks
- There is no meaningful difference between the two types of risk
Correct answer: Systematic risk affects the entire market and cannot be diversified away; unsystematic risk is specific to individual companies and can be reduced through diversification
Systematic (market) risk affects all investments and cannot be diversified away, while unsystematic (company-specific) risk can be reduced by holding a diversified portfolio.
Question 4: What is a 'benchmark' used for in portfolio management?
- A minimum return guaranteed by the adviser
- A standard index or reference point used to evaluate the relative performance of a portfolio (Correct answer)
- The regulatory standard for investment adviser performance
- A model portfolio constructed by regulators
Correct answer: A standard index or reference point used to evaluate the relative performance of a portfolio
A benchmark (typically a market index) serves as the reference point against which a portfolio's performance is compared to assess whether the manager added value.
Question 5: What is Monte Carlo simulation used for in financial planning?
- To calculate the exact future value of a portfolio
- To model the probability of various outcomes by running thousands of random scenarios using historical data (Correct answer)
- To determine the optimal asset allocation for a specific client
- To replicate the performance of a market index
Correct answer: To model the probability of various outcomes by running thousands of random scenarios using historical data
Monte Carlo simulation runs thousands of scenarios with random variations in returns and other variables to estimate the probability distribution of portfolio outcomes over time.
Question 6: Which portfolio management approach is described as 'top-down' investing?
- Selecting individual stocks first, then grouping them by sector
- Beginning with macroeconomic analysis to identify favorable sectors, then selecting individual securities within those sectors (Correct answer)
- Starting with the riskiest assets and working toward conservative holdings
- Investing in the largest companies first, then smaller ones
Correct answer: Beginning with macroeconomic analysis to identify favorable sectors, then selecting individual securities within those sectors
Top-down investing begins with broad macroeconomic and market analysis to identify attractive sectors or regions, then narrows down to individual security selection within those areas.
Series 65 – Uniform Investment Adviser Law Exam Portfolio Management and Analysis 2
What is the difference between technical analysis and fundamental analysis?