CFA Practice Question

There are 221 practice questions for this study session.

CFA Practice Question

Which of the following statement(s) is (are) true with respect to constructing the proper objectives for an investor?

I. The required rate of return that an investor demands will determine how much risk the manager should take.
II. As the client's risk aversion increases, the manager may include more aggressive investments in the portfolio.
III. If the investor's objective is heavily focused towards income, then it would not be prudent to include securities that are growth-oriented into the portfolio.
IV. An account that will need to generate income in step with inflation must be measured in terms of real performance.
A. I and III
B. II and IV
C. IV only
Explanation: I is false; the amount of risk an investor is willing to take will establish what kinds of return can be realistically expected to be earned from the portfolio.

II is incorrect; as the client's risk aversion increases, the manager must include more conservative investments in the portfolio. Candidates must be careful not to confuse risk aversion with risk tolerance, as these two terms have opposite meanings.

As intuitive as III sounds, it may be very prudent to include growth securities in a portfolio that requires income. It is total return that matters, not its two specific components (income and growth).

User Contributed Comments 4

User Comment
gomez1234 I cant get III. If the objective is income, then you tend to include dividend stocks which are generally not growth stocks. growth stocks do not distribute div.
nmech1984 agree with gomez
TroyJT agree with you two. I think this question / answer needs some revision. It would not be appropriate for a PM to allocate sizeable funds to growth stock when the investor wants income. It would be bad portfolio management and likely a violation of the Duty to the Client.
TroyJT Just re-read it. The question asks which answers are true. Option 3 is false. We are right that growth stocks aren't appropriate for income investors, but the question / answer say that as well. Oops.
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