16. A portfolio manager wants to increase or maintain client returns while mitigating risk. What decision should this portfolio manager make to achieve this goal?
Answer: A
A portfolio manager should avoid risk by not choosing investments deemed to be too risky.
To increase or maintain client returns while mitigating risk, the portfolio manager should prioritize avoiding overly risky investments. This strategy helps to protect the portfolio from potential losses while still aiming for reasonable returns.
A) Avoid risk by not choosing investments deemed to be too risky
This option is correct because it directly addresses the portfolio manager's goal of mitigating risk. By steering clear of high-risk investments, the manager can safeguard the portfolio against significant downturns while still seeking moderate returns.
B) Move all investments to the United States where companies are more stable
While investing in stable U.S. companies might reduce risk to some extent, this option does not directly address the need to maintain or increase returns. Additionally, focusing solely on one geographic area can lead to a lack of diversification, which is critical for managing risk effectively.
C) Purchase stocks that are similar and positively correlated with one another
This approach can increase risk rather than mitigate it, as investing in positively correlated stocks means that they are likely to move in the same direction, amplifying potential losses during market downturns. Therefore, this option does not align with the objective of reducing risk.
D) Transfer all investments to stocks in the industry with the most growth
While targeting high-growth industries may seem appealing for increasing returns, it often entails higher risk. This strategy does not adequately address the need to mitigate risk, as investing heavily in growth sectors can expose the portfolio to volatility and potential losses.
Conclusion
Avoiding risky investments is the most effective strategy for a portfolio manager aiming to enhance client returns while controlling risk. The other options either fail to address risk adequately or increase it, making them unsuitable for the manager's objectives. Thus, option A stands out as the most prudent choice.