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.
Read the first 7 Portfolio Management flashcards as text
Which portfolio management approach attempts to replicate the performance of a market index rather than outperform it?
Answer: Passive management
Passive management (indexing) seeks to match index returns with minimal trading, based on the belief that markets are efficient and consistent outperformance is difficult.
A client invests a fixed dollar amount in a mutual fund every month regardless of price. This strategy is known as:
Answer: Dollar-cost averaging
Dollar-cost averaging involves investing a fixed amount at regular intervals, automatically buying more shares when prices are low and fewer when prices are high.
The Capital Market Line (CML) represents the risk-return trade-off for portfolios that combine:
Answer: The risk-free asset and the market portfolio
The CML shows the expected return of efficient portfolios formed by combining the risk-free asset with the market portfolio, plotted against standard deviation.
When two assets have a correlation coefficient of -1.0, combining them in a portfolio will:
Answer: Potentially eliminate all portfolio risk at a certain weighting
A perfect negative correlation of -1.0 means the assets move in exactly opposite directions, and there exists a weighting that produces a portfolio with zero variance.
Duration is a measure used primarily to assess which type of portfolio risk?
Answer: A fixed-income portfolio's sensitivity to interest rate changes
Duration measures how much a bond or bond portfolio's price will change in response to a change in interest rates; higher duration means greater interest rate sensitivity.
Tax-loss harvesting in a portfolio management context involves:
Answer: Selling securities at a loss to offset capital gains and reduce tax liability
Tax-loss harvesting deliberately realizes losses on securities to offset taxable gains, reducing a client's current tax liability while maintaining overall market exposure.
An adviser wants to reduce portfolio risk by adding an asset class. Which characteristic of the new asset would provide the GREATEST diversification benefit?
Answer: Low correlation with existing portfolio holdings
Diversification benefit is driven by correlation; adding an asset with low (or negative) correlation to existing holdings reduces overall portfolio volatility most effectively.