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Portfolio Management Flashcards

7 cards from real IAR practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. According to Modern Portfolio Theory (MPT), what is the primary benefit of diversification?

    Answer: It reduces unsystematic risk without proportionally reducing expected return

    MPT shows that combining assets with low correlations reduces unsystematic (company-specific) risk while maintaining expected return, improving the risk-return trade-off.

  2. The efficient frontier in Modern Portfolio Theory represents portfolios that:

    Answer: Maximize expected return for a given level of risk

    The efficient frontier consists of portfolios that offer the highest expected return for each level of risk (standard deviation), representing optimal diversification.

  3. An investment adviser is determining strategic asset allocation for a client. Which factor is MOST important in this decision?

    Answer: The client's investment time horizon and risk tolerance

    Strategic asset allocation is a long-term framework driven primarily by the client's time horizon and risk tolerance, which determine the appropriate mix of asset classes.

  4. Which of the following BEST describes systematic risk?

    Answer: Market-wide risk that affects all securities and cannot be diversified away

    Systematic risk (market risk) stems from macroeconomic factors affecting all investments, such as interest rate changes or recessions, and cannot be eliminated through diversification.

  5. A portfolio has a beta of 1.4. If the market rises 10%, what is the expected portfolio return based on beta alone?

    Answer: 14%

    Beta measures sensitivity to market movements; a beta of 1.4 means the portfolio is expected to move 1.4 times the market return, so 1.4 × 10% = 14%.

  6. What does the Sharpe ratio measure?

    Answer: Excess return per unit of total risk (standard deviation)

    The Sharpe ratio calculates (portfolio return – risk-free rate) / standard deviation, measuring how much excess return is earned per unit of total risk.

  7. An adviser rebalances a client's portfolio back to its target allocation annually. What is the PRIMARY purpose of rebalancing?

    Answer: To restore the intended risk-return profile that market drift has altered

    Market movements cause asset class weights to drift from targets, changing the portfolio's risk profile; rebalancing restores the original risk-return alignment consistent with client objectives.