Q5. The performance of professional money managers taken as a whole has been:

A)   above average.

B)   a support for semi-strong form of the EMH.

C)   below average.

Q6. Which of the following statements least likely describes the role of a portfolio manager in perfectly efficient markets? Portfolio managers should:

A)   quantify client's risk tolerance, communicate portfolio policies and strategies, and maintain a strict buy and hold policy avoiding any changes in the portfolio to minimize transaction costs.

B)   construct a portfolio that includes financial and real assets.

C)   construct diversified portfolios that include international securities to eliminate unsystematic risk.

Q7. A portfolio manager should help an individual do all of the following EXCEPT:

A)   ignore risk tolerances because markets are efficient.

B)   offer the client diversification and a stable risk level.

C)   rebalance portfolios when necessary.

Q8. The implication of efficient capital markets and a lack of superior analysts have led to the introduction of:

A)   balanced funds.

B)   index funds.

C)   futures options.

Q5. The performance of professional money managers taken as a whole has been:fficeffice" />

A)   above average.

B)   a support for semi-strong form of the EMH.

C)   below average.

Correct answer is C)

The implication of the strong-form tests is that money managers as a group have not outperformed the buy-and-hold policy. In fact after accounting for fees, mutual funds, bank trust departments, pension plans, and endowment funds are not able to match the performance of a simple buy-and-hold policy.

Q6. Which of the following statements least likely describes the role of a portfolio manager in perfectly efficient markets? Portfolio managers should:

A)   quantify client's risk tolerance, communicate portfolio policies and strategies, and maintain a strict buy and hold policy avoiding any changes in the portfolio to minimize transaction costs.

B)   construct a portfolio that includes financial and real assets.

C)   construct diversified portfolios that include international securities to eliminate unsystematic risk.

Correct answer is A)

A portfolio manager should quantify each client's risk tolerance and communicate portfolio policies and strategies. However, portfolio managers should monitor client's needs and changing circumstances and make appropriate changes to the portfolio. Adhering to a strict buy and hold policy would not be in the client's best interest. Portfolios need to be rebalanced and changed to meet client’s changing needs.

Q7. A portfolio manager should help an individual do all of the following EXCEPT:

A)   ignore risk tolerances because markets are efficient.

B)   offer the client diversification and a stable risk level.

C)   rebalance portfolios when necessary.

Correct answer is A)

Portfolio managers should help their clients quantify their risk tolerances and return needs within the bounds of the client’s liquidity, income, time horizon, legal, and regulatory constraints.

Q8. The implication of efficient capital markets and a lack of superior analysts have led to the introduction of:

A)   balanced funds.

B)   index funds.

C)   futures options.

Correct answer is B)

An index fund is designed to duplicate the composition of a specific index series or market segment. There is a strong argument suggesting that portfolio managers cannot beat the market after fees, therefore an index fund should be used to try to match the market.

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