Reading 54: Basics of Portfolio Planning and Construction-LO 2011, investment, statements, following, including

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Session 12: Portfolio Management
Reading 54: Basics of Portfolio Planning and Construction

LOS c: Discuss risk and return objectives, including their preparation.

 

 

Which of the following statements about the importance of risk and return in the investment objective is least accurate?

A) Expressing investment goals in terms of risk is more appropriate than expressing goals in terms of return.

B) The return objective may be stated in dollar amounts even if the risk objective is stated in percentages.

C) The investor’s risk tolerance is likely to determine what level of return will be feasible.

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Expressing investment goals in terms of risk is not more appropriate than expressing goals in terms of return. The investment objectives should be stated in terms of both risk and return. Risk tolerance will likely help determine what level of expected return is feasible.

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Which of the following statements about risk and return is NOT correct?

A) Return objectives should be considered in conjunction with risk preferences.

B) Return-only objectives provide a more concise and efficient way to measure performance for investment managers.

C) Return objectives may be stated in dollar amounts.

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Return-only objectives may actually lead to unacceptable behavior on the part of investment managers, such as excessive trading (churning) to generate excessive commissions.

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Which of the following statements about risk and return is NOT correct?

A) Specifying investment objectives only in terms of return may expose an investor to inappropriately high levels of risk.

B) Risk and return may be considered on a mutually exclusive basis.

C) Return objectives may be stated in absolute terms.

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Risk and return must always be considered together when expressing investment objectives. Return objectives may be expressed either in absolute terms (dollar amounts) or in percentages.