An analyst notices that for most years that a given class of assets has an abnormally high rate of return, the asset class often has an abnormally low rate of return the next year. Based upon this information, according to Standard V(A), Diligence and Reasonable Basis, the analyst can recommend: A) | short selling assets that have had a good previous year to all clients. |
| | C) | short selling assets that have had a good previous year to clients with a low tolerance for risk. |
| D) | an increased allocation of Treasury bills (T-bills) for all portfolios of assets that have increased dramatically in the previous year. |
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Answer and Explanation
An analyst should not make a recommendation based only upon a statistical anomaly. Furthermore, none of the other choices would be appropriate. Clients with low risk tolerance should not short sell assets. The analyst cannot make a recommendation to all clients because each client has different characteristics and portfolios. The one answer that may have some merit is to increase the allocation of T-bills in portfolios that have had recent, dramatic increases. This would be for the purposes of maintaining a balanced portfolio. But the decision to rebalance must be made on a case-by-case basis and not for all portfolios. |