Managing Your Own Portfolio

Question 1

active portfolio management

Answer 1

Building a portfolio using traditional and modern approaches and managing and controlling it to achieve its objectives; a worthwhile activity that can result in superior returns. (Chapter 13)

Question 2

asset allocation

Answer 2

A scheme that involves dividing one’s portfolio into various asset classes to preserve capital by protecting against negative developments while taking advantage of positive ones. (Chapter 13)

Question 4

constant-dollar plan

Answer 4

A formula plan for timing investment transactions, in which the investor establishes a target dollar amount for the speculative portion of the portfolio and establishes trigger points at which funds are transferred to or from the conservative portion as needed to maintain the target dollar amount. (Chapter 13)

Question 5

constant-ratio plan

Answer 5

A formula plan for timing investment transactions, in which a desired fixed ratio of the speculative portion to the conservative portion of the portfolio is established; when the actual ratio differs by a predetermined amount from the desired ratio, transactions are made to rebalance the portfolio to achieve the desired ratio. (Chapter 13)

Question 6

dollar-cost averaging

Answer 6

A formula plan for timing investment transactions, in which a fixed dollar amount is invested in a security at fixed time intervals. (Chapter 13)

Question 7

fixed-weightings approach

Answer 7

Asset allocation plan in which a fixed percentage of the portfolio is allocated to each asset category. (Chapter 13)

Question 8

flexible-weightings approach

Answer 8

Asset allocation plan in which weights for each asset category are adjusted periodically based on market analysis. (Chapter 13)

Question 9

formula plans

Answer 9

Mechanical methods of portfolio management that try to take advantage of price changes that result from cyclical price movements. (Chapter 13)

Question 10

Jensen’s measure (Jensen’s alpha)

Answer 10

A measure of portfolio performance that uses the portfolio beta and CAPM to calculate its excess return, which may be positive, zero, or negative. (Chapter 13)

Question 11

portfolio revision

Answer 11

The process of selling certain issues in a portfolio and purchasing new ones to replace them. (Chapter 13)

Question 12

security selection

Answer 12

The procedures used to select the specific securities to be held within an asset class. (Chapter 13)

Question 13

Sharpe’s measure

Answer 13

A measure of portfolio performance that measures the risk premium per unit of total risk, which is measured by the portfolio standard deviation of return. (Chapter 13)

Question 14

tactical asset allocation

Answer 14

Asset allocation plan that uses stock-index futures and bond futures to change a portfolio’s asset allocation based on forecast market behavior. (Chapter 13)

Question 15

Treynor’s measure

Answer 15

A measure of portfolio performance that measures the risk premium per unit of undiversifiable risk, which is measured by the portfolio beta. (Chapter 13)

Question 16

variable-ratio plan

Answer 16

A formula plan for timing investment transactions, in which the ratio of the speculative portion to the total portfolio value varies depending on the movement in value of the speculative securities; when the ratio rises or falls by a predetermined amount, the amount committed to the speculative portion of the portfolio is reduced or increased, respectively. (Chapter 13)

Question 17

whipsawing

Answer 17

The situation where a stock temporarily drops in price and then bounces back upward. (Chapter 13)