Reading 14: Managing Individual Investor Portfolios －LOS black, white, style, ability

mayanfang1

Q1. The ability to take risk is best judged by:

A)   the time horizon of both short- and long-term objectives.

B)   the time horizon of only short term objectives.

C)   the time horizon of long term objectives.

Q2. Which of the following statements regarding institutional and individual investors is TRUE?

A)   Time horizon factors are typically more crucial to individuals than institutions.

B)   Institutions and not individual investors should focus on total return.

C)   Portfolio growth is not important when an individual client is faced with substantial income requirements.

Q3. The willingness to take risk is best judged by the:

A)   psychological profile of the investor.

B)   subjective nature of the perspective investments.

C)   financial profile of the investor.

Q4. Brad Piasecki is a successful 35 year old executive in the technology industry with a company that is growing rapidly. Piasecki has a pre-tax income of $150,000 per year, and manages to live well below his means. Piasecki is currently saving for both his retirement, which will take place in 30 years, as well as funding his daughter’s college education, which will begin in 15 years. Piasecki’s investment manager has determined that based on contributions to his portfolio, Piasecki requires at a minimum, an 8 percent annualized return on his investments in order to meet his goals. He also states that Piasecki should invest in a diversified stock and corporate bond portfolio that provides total return with an emphasis on capital gains. When his investment manager gives Piasecki his recommendations, Piasecki replies “I have seen too many of my colleagues buy risky stocks and have their portfolios wiped out. I only want to buy Treasury bonds for my portfolio.” Piasecki checks the yields on Treasury bonds, and sees that best yield he can obtain is 4.5 percent. Which of the following would be the best course of action for Piasecki’s investment manager?

A)   Invest 50 percent in Treasury bonds and 50 percent in the diversified stock/corporate bond portfolio to provide a balance between Piasecki’s risk tolerances and required return.

B)   Recommend investor education and a reassessment of portfolio objectives since the investor’s view is inconsistent with his goals and ability to take risk.

C)   Invest in the Treasury bonds since willingness to take risk always supersedes ability to take risk.

mayanfang1

答案和详解如下：

Q1. Correct answer is A)

The time horizon of both short- and long-term objectives will have direct consequences on an investor’s ability to take risk.

Q2.Correct answer is A)

Institutions as well as individuals should consider a total return perspective. Spending objectives usually represent an income component while growth objectives represent a capital gains component. Even though a client may have a significant current income requirement, attention to portfolio growth is also required. The same is true with respect to inflation. One of the distinguishing factors between individual and institutional investors is time horizon. Institutional investors may have infinite lives, but individuals do not.

Q3. Correct answer is A)

The willingness to take risk is related to the psychological characteristics of investors and is best measured in subjective terms.

Q4. Correct answer is B)         

Given his age, income, and lifestyle, Piasecki would seem to have a high ability to take risk, which conflicts with his willingness to take risk. Also, his required return cannot be achieved given his willingness to take risk. On the exam, a general rule is to go with client’s willingness to take risk unless doing so would jeopardize the portfolio’s ability to meet the investor’s goals (going ahead and investing in the Treasury bonds would not be an option). In this case, investor education and a reassessment of portfolio objectives is the best option. The client obviously cannot meet both his return requirement and risk tolerance goals at the same time, so something has to change – either the client changes his views on risk through education, or he changes the goals of his portfolio. Taking any of the other two actions would either not meet the required return, or would violate the risk tolerance, so investor education is the key. If you see a conflict like this on the exam, make sure the inconsistency is noted and that you recommend investor education.

pundit

a

miguelliu

thx

zhouyp1982

 r

delta_leaf

 thx

hortance

Thanks for sharing!

rinoagu

aaa

mashanghao

v

dandinghe4748

ok