CFA Practice Question

There are 221 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to setting the proper constraints in managing a portfolio?

I. The more certain an investor's financial future, the less liquidity will be in the portfolio, holding everything else constant.
II. The longer the investment horizon, the more emphasis must be placed on any current expectations with regards to the relative performance of the various asset classes.
III. It would be imprudent to include many income-oriented securities in a portfolio that belongs to an investor in a high tax bracket.
IV. Low levels of sophistication are an indication that an investor is inexperienced and hence the manager should overestimate the investor's level of risk tolerance.
A. I and III
B. III and IV
C. II, III, and IV
Explanation: II is incorrect; the longer the investment horizon, the less emphasis must be placed on any current expectations with regards to the relative performance of the various asset classes. Instead, the manager can focus on choosing an asset mix based on their long-term expected performance.

IV is incorrect; low levels of sophistication indicate that an investor is inexperienced and hence the manager should overestimate the investor's level of risk "aversion," which is the same thing as underestimating the investor's level of risk tolerance.

User Contributed Comments 3

User Comment
Profache I is true because it states "holding everything else constant".
rana1970 IV is awesome tricky statement.
houstcarr What if I'm certain that I will need access to liquidity within the next 12 months?
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