Investment Analysis and Portfolio Management Flashcards
6 cards from real AAFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Investment Analysis and Portfolio Management flashcards as text
The information ratio evaluates a portfolio manager's skill by dividing active return by which metric?
Answer: Tracking error
The information ratio divides the portfolio's active return (return minus benchmark return) by its tracking error, measuring consistency of outperformance.
Which concept explains that professional fund managers rarely outperform the market on a risk-adjusted basis consistently?
Answer: Efficient Market Hypothesis
The Efficient Market Hypothesis states that asset prices fully reflect all available information, making consistent risk-adjusted outperformance extremely difficult.
Convexity adjusts a bond's price estimate for which limitation of duration?
Answer: Non-linear price-yield relationship
Convexity corrects for the curvature in the price-yield relationship that duration, a linear approximation, fails to capture for large rate changes.
Which performance attribution method breaks excess return into allocation, selection, and interaction effects?
Answer: Brinson-Hood-Beebower model
The Brinson-Hood-Beebower model decomposes a portfolio's active return into asset allocation, security selection, and an interaction effect versus the benchmark.
Dollar-cost averaging reduces which specific investment risk over time?
Answer: Timing risk
Dollar-cost averaging mitigates timing risk by spreading purchases over time, reducing the danger of investing a lump sum at a market peak.
Which index construction method weights each constituent by its float-adjusted market capitalization?
Answer: Market-cap weighting
Market-cap weighting assigns each security a weight proportional to its free-float market capitalization, making it the most widely used index methodology.