Chapter 15: Portfolio Management: Definition, Types, and Strategies

Question 1

is the art and science of selecting and overseeing a group of investments that meet the long-term financial objectives and risk tolerance of a client, a company, or an institution.

Answer 1

Portfolio management

Question 2

ultimate goal is to maximize the investments’ expected return within an appropriate level of risk exposure.

Answer 2

portfolio manager

Question 3

is the set-it-and-forget-it long-term strategy. It may involve investing in one or more exchange-traded (ETF) index funds.

Answer 3

Passive management

Question 4

Those who build indexed portfolios may use ___________________ to help them optimize the mix.

Answer 4

modern portfolio theory (MPT)

Question 4

involves attempting to beat the performance of an index by actively buying and selling individual stocks and other assets.

Answer 4

Active management

Question 5

are generally actively managed. Active managers may use any of a wide range of quantitative or qualitative models to aid in their evaluations of potential investments.

Answer 5

Closed-end funds

Question 6

Investors who implement an ___________________ use fund managers or brokers to buy and sell stocks in an attempt to outperform a specific index, such as the Standard & Poor’s 500 Index or the Russell 1000 Index.

Answer 6

active portfolio management

Question 7

are branded as passively managed because each has a portfolio manager whose job is to replicate the index rather than select the assets purchased or sold.

Answer 7

Index funds

Question 7

also referred to as index fund management, aims to duplicate the return of a particular market index or benchmark.

Answer 7

Passive portfolio management

Question 8

can be structured as an exchange-traded fund (ETF), a mutual fund, or a unit investment trust.

Answer 8

A passive strategy portfolio

Question 9

is based on the understanding that different types of assets do not move in concert, and some are more volatile than others.

Answer 9

Asset allocation

Question 10

A mix of assets provides balance and protects against risk.

Answer 10

Asset allocation

Question 11

involves spreading the risk and reward of individual securities within an asset class, or between asset classes.

Answer 11

Diversification

Question 12

generally involves selling high-priced securities and putting that money to work in lower-priced and out-of-favor securities.

Answer 12

Rebalancing

Question 13

is used to return a portfolio to its original target allocation at regular intervals, usually annually.

Answer 13

Rebalancing

Question 14

prioritizes maximizing the potential earnings of the portfolio. Often invested in riskier industries or unproven alternative assets, an investor may not care about losses.

Answer 14

aggressive portfolio

Question 15

relates to capital preservation. Extremely risk-adverse investors may adopt a portfolio management strategy that minimizes growth but also minimizes the risk of losses.

Answer 15

conservative portfolio

Question 16

strategy would simply blend an aggressive and conservative approach.

Answer 16

moderate portfolio management

Question 17

still invests heavily in equities but also diversifies and may be more selective in what those equities are.

Answer 17

moderate portfolio

Question 18

investors may be inclined to focus primarily on minimizing taxes, even at the expense of higher returns. This may be especially important for high-earners who are in the highest capital gains tax bracket.

Answer 18

Tax-Efficient