Investment Strategies Flashcards

Which term describes the additional return an investor earns for holding a risky asset instead of a risk-free asset?

Answer: Equity risk premium

The equity risk premium is the excess return investors demand over the risk-free rate for bearing the additional risk of equity investments.

A portfolio with a beta of 1.3 would be expected to:

Answer: Rise 1.3% when the market rises 1%

Beta measures sensitivity to market movements; a beta of 1.3 means the portfolio moves 1.3% for every 1% change in the market index.

Which bond feature gives the issuer the right to redeem the bond before maturity at a specified price?

Answer: Call provision

A call provision gives the issuer (not the investor) the right to retire the bond early, typically exercised when interest rates fall.

An investor uses a protective put strategy by purchasing put options on stocks already held. The primary purpose is to:

Answer: Limit downside loss while preserving upside potential

A protective put acts like insurance, setting a floor on losses if the stock declines while allowing unlimited upside participation.

According to modern portfolio theory, the optimal risky portfolio lies at the point where:

Answer: The Capital Market Line is tangent to the efficient frontier

The tangency portfolio on the efficient frontier, where the Capital Market Line (CML) touches, represents the highest Sharpe ratio achievable.

Which of the following strategies is most associated with passive investment management?

Answer: Replicating a benchmark index at minimal cost

Passive management seeks to replicate index performance by holding the same securities in the same proportions at low cost, minimizing turnover.

A convertible bond allows the bondholder to:

Answer: Exchange the bond for a predetermined number of common shares

A convertible bond includes an option for the holder to convert the debt instrument into a specified number of the issuer's common shares.