honeycfa

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

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

B) ignore risk tolerances because markets are efficient.

C) rebalance portfolios when necessary.

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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.

honeycfa

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

A) index funds.

B) balanced funds.

C) futures options.

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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.

honeycfa

LOS c, (Part 3): Explain the rationale for investing in index funds.

Which of the following statements regarding index funds is least accurate?

A) One disadvantage of index funds is that they do not provide access to international securities.

B) One advantage of index funds is that they allow for diversification that is typically not available to the average individual investor due to a lack of resources.

C) One might conclude from the efficient market literature that an investor should mimic the market's performance and minimize costs by buying index funds.

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An advantage of index funds is that they do offer international diversification via international index funds.

honeycfa

Given that markets are efficient, which of the following is least likely to cause an actively managed mutual fund to underperform an index fund?

A) Taxes.

B) Management expenses.

C) Inferior stock selection.

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Inferior stock selection would not be a reason because, in an efficient market, all securities are priced perfectly. Therefore, there are no undervalued or overvalued securities. Since all securities are perfectly priced, the investor should select a strategy that minimizes taxes, transactions costs, and management expenses.

honeycfa

Assuming that markets are efficient, which of the following statements is FALSE?

A) Investors should not trade often.

B) Markets will not be volatile.

C) Investors should buy and hold passively managed index funds.

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If markets are efficient, prices are correct. Therefore, the best investment strategy is one that chooses a market index and then minimizes investment expenses, such as transaction costs. Markets may still be volatile if important news is arriving to the market, at which time the market will react to the news, perhaps with great volatility until the news is digested.

honeycfa

Which of the following is NOT a rationale for investing in index funds?

A) Active mutual fund managers underperform index funds.

B) Efficient financial markets.

C) Minimize risk.

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The minimization of risk is not a rationale for investing in index funds.