1. Modern portfolio theory stresses the correlation between:
A. particular portfolio and a benchmark portfolio.
B. individual securities within a portfolio.
C. individual securities macroeconomic variables.
2. The planning step in the portfolio management process includes:
A. deciding the asset allocation between equities, fixed income securities and cash.
B. preparation of an investment policy statement.
C. identifying attractive investments in particular market segments.
3. Which of the following institutional investors is most likely to have a low risk tolerance and relatively high liquidity needs?
A. Endowment foundations.
B. Defined benefit pension plans.
C. Insurance companies.
1. B is correct. The main conclusion of MPT is that investors should not only hold portfolios, but should also focus on how individual securities in the portfolios are related to one another.
2. B is correct. The planning step in the portfolio management process includes understanding the client’s needs and preparation of an investment policy statement. Asset allocation and security analysis are parts of the execution step in the process.
3. C is correct. C is correct because insurance companies need to be relatively conservative and liquid given the necessity of paying claims when due.Endowments and defined benefit pension plans typically have long time horizons and relatively high risk tolerance.