Reading 54: Basics of Portfolio Planning and Construction-LO 2011, investment, following, investing, written

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

LOS a: Explain the reasons for a written investment policy statement (IPS).

 

 

Which of the following is NOT a rationale for the importance of the policy statement in investing? It:

A) identifies specific stocks the investor may wish to purchase.

B) helps investors understand the risks and costs of investing.

C) forces investors to understand their needs and constraints.

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The policy statement outlines broad objectives and constraints but does not get into the details of specific stocks for investment.

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Which of the following best describes the importance of the policy statement? It:

A) outlines the best investments.

B) states the standards by which the portfolio's performance will be judged.

C) limits the risks taken by the investor.

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The policy statement should state the performance standards by which the portfolio's performance will be judged and specify the benchmark that represents the investors risk preferences.

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Which of the following is NOT a rationale for the importance of the policy statement in investing? It:

A) allows the investor to judge performance by objective standards.

B) specifies a benchmark against which to judge performance.

C) forces investors to take risks.

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By no means should the policy statement force the investor to take risks. The statement forces investors to understand the risks of investing.