Portfolio Management - Portfolio Management Section 2
- Option : B
- Explanation : Since the portfolio is not fully diversified, a measure based on total risk (M-Squared) is more appropriate relative to measures based on systematic risk (Jensen’s alpha and Treynor ratio).
7. The following information is provided about a stock market index m and security i:
| Statistic | Value |
| Covariance between market return and security return [Cov(Ri, Rm)] | 0.01208 |
| Correlation coefficient between market return and security return (ρi,m) | 0.35 |
| Standard deviation of market return (σm) | 0.15 |
The beta of security i, βi, is closest to:
- Option : C
- Explanation : The beta of security i is calculated as: βi = Cov(Ri, Rm)/σm2 = 0.01208/(0.15)2 = 0.54.
- Option : B
- Explanation : The less the systematic risk of a stock, the less is its expected return.Therefore, stock B will have a lower expected return than stock A.
- Option : A
- Explanation : The mere fact that a written IPS is prepared for a client, does not ensure that risk and return objectives will in fact be achieved.
- Option : B
- Explanation : A written IPS is best seen as a communication instrument allowing clients and portfolio managers to mutually establish investment objectives and constraints.
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