Question

Under modern portfolio theory, investment performance is evaluated on the basis of the performance of the entire portfolio, rather than the performance of a single investment. This theory seeks to minimize risk by encouraging the diversification of investments and is most associated with which of the following:

a. Prudent-Man Rule
b. Prudent-Investor Rule
c. Establishment of the investment objective for each account
d. Buying and selling assets for the trust

Answer 1

The correct answer is option b. Prudent-Investor Rule.

Step-by-step explanation:

The concept described in the student's question is most associated with the Prudent-Investor Rule. Modern portfolio theory promotes the diversification of investments to minimize risk and does not evaluate the performance of single investments in isolation, but rather the performance of the entire portfolio.

Under this theory, investors are often encouraged to invest in mutual funds since a mutual fund pools money from many investors to purchase a broad range of stocks, bonds, or other securities.

In practice, this minimizes the impact of any one security's poor performance on the overall portfolio. A well-known strategy within mutual funds is the index fund, which seeks to imitate the behavior of a market index like the S&P 500 and benefits from the diversification principle.