Question

(01) Safety-First ratio measure excess return per unit of risk in an investment asset.

            (a) TRUE

            (b) FALSE

(02) Legal and regulatory requirements and tax incentives favor holding fixed-income

     securities.

            (a) TRUE

            (b) FALSE

(03) The relation between risk tolerance and risk aversion are zero

            (a) TRUE

            (b) FALSE

(04) Risk aversion of 6 to 8 represent low degree risk aversion and a high-risk tolerance.

            (a) TRUE

            (b) FALSE

(05) When U_A> U_B, the investor should prefer portfolio “A” since expected utility or risk

      adjusted expected return principle of both portfolios.

            (a) TRUE

            (b) FALSE

(06) Lower the coefficient of the risk aversion (RA) higher the investors expected utility or

     risk adjusted return.

(a) TRUE

            (b) FALSE

(07) Shortfall risk (downside risk) can be measure by using sharp or reward volatility ratio.

            (a) TRUE

            (b) FALSE

(08) Major components of Investment policy statement (IPS) are return objectives and

      risk tolerance.

            (a) TRUE

            (b) FALSE

(09) Two major components of total risk are diversifiable and unsystematic risk

            (a) TRUE

            (b) FALSE

(10) Tactical Asset Allocation involves making short-term adjustment to assets weigh and it is an active and ongoing investment discipline.

(a) TRUE

            (b) FALSE

Answer 1

(01) TRUE

Explanation - As safety First Ratio is E(R_p - R_L ) / SD of portfolio

Where (E(R_P) – R_L), explains the distance from the Average return to the threshold level, i.e., it measures the excess return over and above the threshold level of return, per unit risk.  

(02) TRUE

Explanation - Government wants to enhance the habit of savings among public which is why there are various schemes in which Government allows Tax saving. Such as PPF, PF etc

(05) TRUE

Explanation - As the Utility In portfolio A is greater that Utility In portfolio B then investor should prefer the portfolio A it provides more satisfaction at a given level of risk

(06) TRUE

Explanation - As Utility function is given by, Utility Score = Expected Return - 0.5 x σ² A

where A is Coefficient of risk aversion

As we can Understand if A will increase as a result the Utility will decrease

(08) TRUE

Explanation - Investment policy statement is a well drafted document between the portfolio manager and the customer which explains the process that how the portfolio manager will manage the money of the customer. Therefore Return objective and risk tolerance is one of the most important point that is considered by the portfolio manger

(09) FALSE

Explanation - Two major components of Total risk is systematic risk and unsystematic risk in which Unsystematic risk is also known as diversifiable risk that can be diversified. therefore the two components given in the question are same.

(10) TRUE

Explanation - In Tactical asset allocation strategy the investor engages in actively managing the fund by changing the proportion time to time according to the market scenario to take benefit from the price movement in different asset class.