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The Warren Buffett Way Workbook by Russell Rhoads, Robert G. Hagstrom

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Chapter 5

Portfolio Management

THE MATHEMATICS OF INVESTING

Answers to Multiple-Choice Questions

1. B. Portfolio management is a combination of the construction of a portfolio and the ongoing management of the portfolio.

2. D. Warren Buffett has three important portfolio management constructs. First is his method for optimally building a portfolio for long-term growth. Second is his alternative measuring stick for judging the progress of a portfolio. Last is his method of coping with the emotional roller coaster that inevitably accompanies the portfolio management process.

3. D. Warren Buffett does not think in seconds, minutes, days, months, or quarters. His performance outlook is long-term and measured in years.

4. C. Currently, portfolio management appears to be locked in a tug-of-war between active portfolio management and index investing.

5. B. Index investing is a buy-and-hold approach to portfolio management. It involves assembling and then holding a broadly diversified portfolio of common stocks deliberately designed to mimic the behavior of a specific benchmark index such as the S&P 500.

6. C. Active portfolio managers argue that due to their superior stock-picking skills they should outperform an index. However, annually from 1980 through 2001 only 41 percent of large-cap mutual funds beat the S&P 500 index.

7. A. It is not correct to consider index investing purely a passive strategy. For example, there is a nine-person stock selection committee at Standard & Poor’s ...

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