Reading 28: Relative-Value Methodologies for Global Corpora management, needs, short

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CFA Institute Area 8-11, 13: Asset Valuation
Session 8: Management of Passive and Active Fixed Income Portfolios
Reading 28: Relative-Value Methodologies for Global Corporate Bond Portfolio Management
LOS c: Summarize the influence of investors' short- and long-term liquidity needs on portfolio management decisions.

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The ability to buy or sell quickly at a fair price is best described by which of the following terms?

A) Marketability.

B) Liquidity.

C) Efficiency.

D) Cohesion.

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Answer and Explanation

Liquidity is the ability to buy or sell quickly at a fair price.

Liquidity is the ability to buy or sell quickly at a fair price.

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When calculating the risk premium for an equity market, which of the following is most accurate? The use of a moving average of historical returns during bear markets will result in:

A) low risk premiums, which is opposite to most investors expectations.

B) high risk premiums, which is opposite to most investors expectations.

C) low risk premiums, in accordance with most investors expectations.

D) high risk premiums, in accordance with most investors expectations.

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Answer and Explanation

During bear markets, recent stock returns will be low which will result in low calculated risk premiums. During bear markets, investors risk premiums are higher due to higher expected stock returns in the future.

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When calculating the risk premium for an equity market using historical returns, which of the following is most accurate?

A) Geometric mean returns should be used because they are more applicable to single time horizons.

B) Geometric mean returns should be used because they are more applicable to multi-period time horizons.

C) Arithmetic mean returns should be used because they are more applicable to single time horizons.

D) Arithmetic mean returns should be used because they are more applicable to multi-period time horizons.

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Answer and Explanation

Geometric mean returns should be used because they are more applicable to multi-period time horizons, which corresponds to the time horizon of most investors. Arithmetic mean returns provide the most likely returns in a single period but are not usually used to calculate equity risk premiums.