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Chapter 15 - Selecting a Mutual Fund Questions and Answers
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Chapter 15 - Selecting a Mutual Fund Questions and Answers Highest to lowest risk: Balanced funds Real estate funds Specialty funds Mortgage funds Specialty funds Real estate funds Balanced funds Mortgage funds Highest to lowest risk all funds: SREDBBMM Specialty Funds Real Estate...

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  • August 18, 2024
  • 5
  • 2024/2025
  • Exam (elaborations)
  • Questions & answers

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  • chapter 15 selecting a mutual fund questions and
  • highest to lowest risk balanced funds real estate
  • highest to lowest risk all funds sredbbmm special

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Chapter 15 - Selecting a Mutual Fund
Questions and Answers
Highest to lowest risk:
Balanced funds
Real estate funds
Specialty funds
Mortgage funds - answer Specialty funds
Real estate funds
Balanced funds
Mortgage funds

Highest to lowest risk all funds: SREDBBMM - answer Specialty Funds
Real Estate Funds
Equity Funds
Dividend Funds
Balanced Funds
Bond Funds
Mortgage Funds
Money Market Funds

What type of risk is described by sensitivity of a security's price to new information
leading to changes in demand? - answer Unique risk (also called Specific risk)

Your client is interested in reducing the potential for default risk (The unique risk that a
bond coupon will not be paid) in her fixed-income portfolio. What would you recommend
to your client? - answer Avoid specializing in corporate bonds

Your client is looking for ways to eliminate systematic risk (Market risk (also called
systematic risk)). What strategy is there that you can recommend that eliminates
systematic risk? - answer There are no strategies available

What type of risk is described by changes in the overall market affecting an entire class
of securities? - answer Market risk (also called systematic risk)

Unique risk (also called Specific risk) - answer Sensitivity of a security's price to new
information leading to changes in demand

Can be reduced with diversification

Default risk - answer The unique risk that a bond coupon will not be paid

Reduced by avoiding specializing in corporate bonds

, Market risk (also called systematic risk) - answer Changes in the overall market
affecting an entire class of securities

No ways to reduced risk

Exchange rate risk - answer Changes in the relative value of the currencies of the
countries of investment

reduced by Hedging

Interest rate risk - answer Changes in interest rates leading to changes in fixed-
income securities prices

Reduced by Avoid specializing in fixed-income securities

Based on the belief that different industries will perform well during certain stages of the
economic cycle. - answer Sector rotation

This strategy involves moving between long-term government bonds and very short-
term T-bills, based on changing forecasts. - answer Interest rate anticipation

This investment philosophy looks to buy a firm or equity fund for less than what the
assets in place are worth. - answer Value investing

A style that is concerned more about the future prospectus of a firm than its present
price. - answer Growth investing

Momentum Investing - answer Momentum managers believe that strong gains in
earnings or stock price will translate into stronger gains in earnings or stock price. They
tend to use technical or quantitative stock selection models with some fundamental
variables to smooth out the volatile nature of the style. It is a high-risk, high-return
strategy. Momentum portfolios typically have high turnover rates as failing stocks are
sold. Portfolios also tend to be more concentrated in certain areas of the economy than
other funds.

Security Selection - answer Selecting bonds involves fundamental and credit
analysis and quantitative valuation of individual securities. Fundamental analysis of a
bond considers the nature of the security and the potential cash flow. Credit analysis
evaluates the likelihood that the payments will be received as contracted. Credit
analysis also considers the issuer's industry conditions, the economy and other
macroeconomic factors, as well as factors specific to the issuer.

Sector Trading - answer Sector traders vary the weights of different types of bonds
held within a portfolio. A portfolio manager forms an opinion on the valuation of a
specific sector of the bond market based on its credit fundamentals and on relative

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