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CFA - Portfolio Management Exam Questions and Answers 2024( A+ GRADED 100% VERIFIED).
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CFA - Portfolio Management Exam Questions and Answers 2024( A+ GRADED 100% VERIFIED).
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CFA - Portfolio ManagementRisk and Return - ANS Portfolios affect risk more than returns
- the best reason for portfolios is reducing risk, not necessarily protection from downside risk or
guarantee of avoiding losses
- Return expectations can be developed from historical data, economic analysis, or valuation
models
- Risk expectations: standard deviation and correlation estimates are primarily obtained from
historical data.
Diversification Ratio - ANS The ratio of the risk of an equally weighted portfolio of n securities to
the risk of a single random security from the list of n securities
- measures the risk reduction benefits of a simple portfolio construction method, equal weighting
- A Greater Portfolio Effect = lower Diversification Ratio
Modern Portfolio Theory (MPT) - ANS A method of choosing investments that focuses on the
importance of the relationships among all of the investments in a portfolio rather than the
individual merits of each investment. The method allows investors to quantify and control the
amount of risk they accept and return they achieve.
- an asset's risk should be measured in relation to the remaining systematic or non-diversifiable
risk (which should be the only risk that affects the asset's price
Steps in the Portfolio Management Process - ANS 1) Planning:
- understanding client's needs
- preparation of an investment policy statement (IPS) which takes into account their needs
(constraints and objectives). May state a benchmark (maybe ror or performance of a certain
index) to be used as comparison in the feedback stage
2) Execution:
- Asset allocation
- Security analysis
- portfolio construction
3) Feedback:
- Portfolio monitoring and rebalancing
- Performance measurement and reporting
Top-Down vs Bottom-Up Approach - ANS - Top-Down: start by looking at macroeconomic
conditions, then markets, then industries, then specific companies
- Bottom-Up: Looks at company-specific circumstances (management and business prospects),
before any other factors (if at all)
Individual (Retail) Investors - ANS Motives:
, - providing for family
- saving in general
- starting a business
- fueling a retirement goal - usually through a Defined Contribution (DC) Plan
Asset managers may distribute their products directly to investors or through intermediaries
such as advisers and/or retirement plan providers. Or through online brokerages, as financial
advisers are often independent.
Defined Contribution (DC) Plans - ANS Retirement/Pension Plans in the employee's name,
usually funded by both the employee and the employer. Employee accepts investment and
inflation risks
- 401(K)s in the US
- group personal pension schemes in the UK
- superannuation plans in Australia
- Investing for Growth (usually younger individuals) will invest in assets with more potential for
capital gains
- Investing for Income (retirees or risk averse ppl) will invest in more fixed-income securities or
dividend-paying shares
*Becoming preferred over DB plans because they have lower costs and risk to the company
(especially in the US and AUS)
Institutional Investors - ANS - Defined Benefit Pension Plans
- Endowments and Foundations
- Banks
- Insurance Companies
- Investment Companies
- Sovereign Wealth Funds
Defined Benefit (DB) Plans - ANS Retirement/Pension Plans that are company-sponsored and
offer employees a predefined benefit on retirement
- Predefined because they require the plan sponsor to specify the obligation stated in terms of
the retirement income benefits owed to participants
- employers bear risk associated with adequately funding the benefits offered
- the assets of these plans are there to fund the payments, so plan managers need to ensure
that sufficient assets will be available to pay pensions as they become due
Endowments and Foundations - ANS - Endowments are funds of non-profit institutions that
help the institutions provide designated services
- Foundations are grant-making entities
- They both typically allocate a sizable portion of their assets in alternative investment because
they have LT horizons
, Mutual Funds - ANS Pool money from several investors and invest the funds into a portfolio of
securities
- Open-end Funds: accept new funds and issue new shares at a value equal to the fund's
current NAV at time of investment. Allow investors to redeem their investment at that NAV. tend
not to be fully invested but rather keep some cash for redemptions not covered by new
investments
- Closed-end Funds: don't accept new money and shares are traded on 2ndary market to other
investors. Can trade at a discount/premium, unlike open-end funds
- No-Load Funds: only charge an annual fee that is based on a % of the fund's NAV
- Load Funds: charge an annual % fee for investing in the fund, and also for redemptions
Problems with Open-End/Closed-End Funds - ANS Open-End:
- portfolio manager needs to manage cash inflows and outflows, as well as redemptions
- inflow of new investments requires the manager to find new investments
- funds always need to keep cash on hand for redemptions
Closed-End:
- none accept that they cannot take new investments
ETFs vs Mutual Funds - ANS - ETFs purchase shares from other investors (like stock) whereas
MF investors purchase directly from the fund
- ETFs can be shorted, and even purchased on margin
- ETFs have lower costs, BUT investors do incur brokerage costs, unlike on MFs
- ETFs trade like stock, any time of day, at market price. MF purchases and redemptions
happen at EOD, at same price
- ETFs pay out dividends, MFs reinvest dividends
- ETFs usually have smaller minimum required investment
- ETFs have tax advantage over index MFs
Holding Period Return - ANS return earned on an investment over a single specific period of
time
Total Return (multiple periods) = ((1 + R1)*(1 + R2)*.....(1 + Rn)) - 1
Arithmetic Return/Mean Return - ANS A simple average of all HPRs
- used to calculate dispersion of known returns
- upward biased: assumes the amount invested at the beginning of each period is the same.
Particularly severe if HPRs are a mix of both positive and negative returns
Geometric Mean Return - ANS Accounts for compounding of returns, and does not assume
that the amount invested in each period is the same
- will be < arithmetic mean because of compounding, UNLESS no variation in returns, and
therefore GM = AM
Money-Weighted Return - ANS Accounts for the amount of money invested in each period and
provides information on the return earned on the actual amount invested
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