Investment Strategies Flashcards
7 cards from real AAMS practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Investment Strategies flashcards as text
Which option strategy creates a 'collar' to protect against downside loss on a long stock position?
Answer: Buying a protective put and simultaneously selling a covered call
A collar combines a long put (downside protection) with a short call (premium income that offsets put cost), limiting both downside and upside.
In a rising interest rate environment, which bond characteristic best protects an investor from significant price decline?
Answer: Short duration and high coupon
Short duration bonds reprice quickly and return principal sooner, while higher coupons reduce duration, minimizing price sensitivity to rising rates.
The 'quality' factor in smart-beta investing typically selects stocks based on which criteria?
Answer: High return on equity, low debt, and stable earnings
Quality factor strategies favor companies with strong profitability metrics, low financial leverage, and consistent earnings—characteristics linked to long-term outperformance.
A 'global macro' hedge fund strategy primarily generates returns by:
Answer: Making directional bets on currencies, interest rates, and economies across countries
Global macro funds take positions across currencies, sovereign bonds, equity indices, and commodities based on macroeconomic analysis of different countries.
Which concept explains why adding a low-correlation asset to a portfolio can reduce overall portfolio volatility even if that asset has higher standalone volatility?
Answer: Diversification benefit from correlation less than 1.0
When asset correlations are below 1.0, combining them reduces portfolio variance below the weighted average of individual variances, producing diversification benefits.
A 'dynamic asset allocation' strategy that systematically reduces equity exposure as markets decline (to lock in gains) is known as:
Answer: Constant-proportion portfolio insurance (CPPI)
CPPI uses a floor value and multiplier to dynamically shift between risky assets and safe assets, reducing equity as portfolio value falls toward the floor.
When evaluating active managers, which metric adjusts return for risk by dividing the manager's excess return above the benchmark by the portfolio's tracking error?
Answer: Information ratio
The information ratio measures a manager's active return per unit of active risk (tracking error), assessing the efficiency of active management decisions.