Question one (5 Points)

1. A sound policy statement helps to protect the client:

1. against a portfolio managers inappropriate investments
2. Unethical behavior. Without clear, written guidance,
3. Some managers may consider investing in high-risk investments, hoping to earn a quick return. Such actions are probably counter to the investors specified needs and risk preferences.
4. Though legal recourse is a possibility against such action, writing a clear and unambiguous policy statement should reduce the possibility of such inappropriate manager behavior.
5. All of the above correct

2. Before an investor and advisor can construct a policy statement, they need to have

1. An open and frank exchange of information, ideas, fears, and goals.
2. To build a framework for this information-gathering process, the client and advisor need not to discuss the clients investment objectives and constraints.
3. All of the above correct
4. None of the above correct

3. The way to measure whether two investments will contribute to diversifying a portfolio is to compute the correlation coefficient between their rates of return over time.

1. True
2. False

4. Which of the following statements are correct?

1. Correlation coefficients can range from +1.00 to 1.00.
2. A correlation of +1.00 means that the rates of return for these two investments move exactly together.
3. Combining investments that move together in a portfolio would not help diversify the portfolio because they have identical rate-of-return patterns over time.
4. a correlation coefficient of 1.00 means that the rates of return for two investments move exactly opposite to each other.
5. All of the above are correct

(5) When one investment is experiencing above-average rates of return, the other is suffering through similar below-average rates of return. Combining two investments with large negative correlation in a portfolio would contribute much to diversification because it would stabilize the rates of return over time, reducing the standard deviation of the portfolio rates of return and hence the risk of the portfolio.

1. True
2. False