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statement. (5 points each) 1. Assume you're a manager meeting with other managers discussing your company's 401k plan. The plan provides mutual funds as the investment medium. This management group assumes fiduciary responsibility for the plan and, therefore, assumes responsibility to plan participants for providing a diversified choice of investments with potential for income and growth of princi- pal. Upon discovery that four of the five funds lost money in the past year, one of the managers argues that the company should replace the underperforming funds. She elaborates, asking "If these investments fail to yield a positive return, then how can we defend retaining the funds? Which of the following tenets should underlie your response? A. Management's fiduciary responsibility mandates the company replace the losing mutual funds. B. Management should evaluate performance in the context of fund benchmarks, peer performance, and fund risks. C. Mutual funds are intended to be long-term investments that should generally not be sold until investment objectives have been met. D. Regulation 404c requires that 401k investments offer participants choices that will enable exposure to diverse investments. Management should recognize that, if four of the funds lost money, the plan may fail the 404c test. 2. Suppose you want to hire a financial adviser who can help you construct a well-balanced invest- ment portfolio. In your interview with one prospective financial adviser, he states that broad diversification underlies his investment strategy. He states that, through careful selection of investments, investor can eliminate financial risk. He further states that he prefers to use exchange-traded index funds instead of mutual funds because of their relatively low expense and propensity to outperform conventional managed mutual funds. You leave the interview favorably impressed but concerned that he may have presented an overly optimistic pitch. Which of the following items identifies the weakest point in his presentation? A. Professional money managers have a greater chance of achieving extraordinary results than index funds. Therefore, his preference for ETF indexes may be wrong. B. Broad diversification is a good idea, but practical limitations reduce the likelihood of consistently developing portfolios that can be placed on the efficient frontier. C. Financial risk can't be eliminated. D. Use of exchange-traded funds forces investors to pay commissions, which can significantly retard investment returns. statement. (5 points each) 1. Assume you're a manager meeting with other managers discussing your company's 401k plan. The plan provides mutual funds as the investment medium. This management group assumes fiduciary responsibility for the plan and, therefore, assumes responsibility to plan participants for providing a diversified choice of investments with potential for income and growth of princi- pal. Upon discovery that four of the five funds lost money in the past year, one of the managers argues that the company should replace the underperforming funds. She elaborates, asking "If these investments fail to yield a positive return, then how can we defend retaining the funds? Which of the following tenets should underlie your response? A. Management's fiduciary responsibility mandates the company replace the losing mutual funds. B. Management should evaluate performance in the context of fund benchmarks, peer performance, and fund risks. C. Mutual funds are intended to be long-term investments that should generally not be sold until investment objectives have been met. D. Regulation 404c requires that 401k investments offer participants choices that will enable exposure to diverse investments. Management should recognize that, if four of the funds lost money, the plan may fail the 404c test. 2. Suppose you want to hire a financial adviser who can help you construct a well-balanced invest- ment portfolio. In your interview with one prospective financial adviser, he states that broad diversification underlies his investment strategy. He states that, through careful selection of investments, investor can eliminate financial risk. He further states that he prefers to use exchange-traded index funds instead of mutual funds because of their relatively low expense and propensity to outperform conventional managed mutual funds. You leave the interview favorably impressed but concerned that he may have presented an overly optimistic pitch. Which of the following items identifies the weakest point in his presentation? A. Professional money managers have a greater chance of achieving extraordinary results than index funds. Therefore, his preference for ETF indexes may be wrong. B. Broad diversification is a good idea, but practical limitations reduce the likelihood of consistently developing portfolios that can be placed on the efficient frontier. C. Financial risk can't be eliminated. D. Use of exchange-traded funds forces investors to pay commissions, which can significantly retard investment returns
