1. The investment policy statement is most accurately considered:
A. the starting point of the portfolio management process.
B. the key intermediate step in the portfolio management process.
C. the end product of the portfolio management process.
2. The component of an investment policy statement that defines the investment objectives is most
likely to include information about:
A. the investor’s risk tolerance.
B. unique needs and preferences of the investor.
C. permitted asset types and use of leverage in the investment account.
3. When an investment advisor is developing return and risk objectives for a client:
A. return objectives should be absolute and risk objectives should be relative.
B. risk objectives should be absolute and return objectives should be relative.
C. both return and risk objectives may be stated in absolute or relative terms.
4. A client exhibits an above-average willingness to take risk but a below-average ability to take
risk. When assigning an overall risk tolerance, the investment adviser is most likely to assess the
client’s overall risk tolerance as:
A. above average.
C. below average.
5. Which of the following is least likely an example of a portfolio constraint?
A. Higher tax rate on dividend income than on capital gains.
B. Significant spending requirements in the near future.
C. Minimum total return requirement of 8%.
6. For asset allocation purposes, asset classes should be specified such that correlations of returns
A. low within each asset class and low among asset classes.
B. high within each asset class and low among asset classes.
C. low within each asset class and high among asset classes.
7. In determining the appropriate asset allocation for a client’s investment account, the manager
A. consider only the investor’s risk tolerance.
B. incorporate forecasts of future economic conditions.
C. consider the investor’s risk tolerance and future needs, but not forecasts of market conditions.