Portfolio Construction

Question 1

What is portfolio construction?

Answer 1

The process of selecting and assembling a mix of investment assets to achieve specific financial goals.

Question 2

What is the primary goal of portfolio construction?

Answer 2

To maximize returns while minimizing risk.

Question 3

True or False: Diversification is a key principle in portfolio construction.

Answer 3

True

Question 4

Fill in the blank: The risk-return tradeoff suggests that higher potential returns are associated with ______ risk.

Answer 4

higher

Question 5

What does ‘asset allocation’ refer to?

Answer 5

The process of dividing investments among different asset categories, such as stocks, bonds, and cash.

Question 6

What is the difference between systematic and unsystematic risk?

Answer 6

Systematic risk affects the entire market, while unsystematic risk is specific to a particular company or industry.

Question 7

What is a risk tolerance assessment?

Answer 7

An evaluation of an investor’s willingness and ability to endure market volatility.

Question 8

True or False: A well-constructed portfolio eliminates all risks.

Answer 8

False

Question 9

What is the purpose of rebalancing a portfolio?

Answer 9

To maintain the desired level of risk and asset allocation over time.

Question 10

What is the Capital Asset Pricing Model (CAPM)?

Answer 10

A model that describes the relationship between systematic risk and expected return for assets.

Question 11

Multiple Choice: Which of the following is a common risk measure in portfolio construction? A) Alpha B) Beta C) Gamma

Answer 11

B) Beta

Question 12

What is ‘alpha’ in the context of investments?

Answer 12

A measure of an investment’s performance relative to a benchmark index.

Question 13

Fill in the blank: The ______ effect refers to the tendency of stocks to perform better in January.

Answer 13

January

Question 14

What are ‘liquid assets’?

Answer 14

Assets that can be quickly converted to cash without a significant loss in value.

Question 15

True or False: Bonds are generally considered lower risk than stocks.

Answer 15

True

Question 16

What is a ‘target date fund’?

Answer 16

A mutual fund that automatically adjusts its asset allocation based on a specific retirement date.

Question 17

What does ‘market capitalization’ indicate?

Answer 17

The total market value of a company’s outstanding shares of stock.

Question 18

Multiple Choice: Which type of investment typically has the highest potential return? A) Bonds B) Stocks C) Cash

Answer 18

B) Stocks

Question 19

What is a ‘growth stock’?

Answer 19

A stock expected to grow at an above-average rate compared to its industry or the overall market.

Question 20

Fill in the blank: ______ funds invest primarily in stocks and aim for high capital appreciation.

Answer 20

Equity

Question 21

What is ‘volatility’ in investment terms?

Answer 21

A statistical measure of the dispersion of returns for a given security or market index.

Question 22

True or False: A diversified portfolio is less likely to experience extreme fluctuations in value.

Answer 22

True

Question 23

What does ‘liability matching’ involve?

Answer 23

Aligning the investment strategy with future liabilities to ensure funds are available when needed.

Question 24

What is ‘investment horizon’?

Answer 24

The length of time an investor expects to hold an investment before needing to access the funds.

Question 25

Multiple Choice: Which asset class typically provides income? A) Stocks B) Bonds C) Derivatives

Answer 25

B) Bonds

Question 26

What is 'asset correlation'?

Answer 26

A statistical measure of how asset prices move in relation to each other.

Question 27

Fill in the blank: The ______ theory suggests that investors can achieve optimal portfolios by diversifying across uncorrelated assets.

Answer 27

Modern Portfolio

Question 28

What does 'Sharpe Ratio' measure?

Answer 28

The risk-adjusted return of an investment, calculated as the difference between the return of the investment and the risk-free rate divided by the standard deviation of the investment's returns.

Question 29

True or False: Higher diversification always leads to higher returns.

Answer 29

False

Question 30

What is a 'passive investment strategy'?

Answer 30

An investment approach that aims to replicate the performance of a specific index rather than actively selecting securities.

Question 31

What does 'reinvestment risk' refer to?

Answer 31

The risk that cash flows from an investment will have to be reinvested at a lower rate of return.

Question 32

Fill in the blank: The ______ model helps investors understand the expected return based on systematic risk.

Answer 32

CAPM

Question 33

What is 'downside risk'?

Answer 33

The potential loss an investment may incur due to unfavorable market movements.

Question 34

Multiple Choice: Which of the following is an example of a defensive stock? A) Utility company B) Technology firm C) Biotech startup

Answer 34

A) Utility company

Question 35

What does 'currency risk' involve?

Answer 35

The potential for loss due to fluctuations in exchange rates affecting investments in foreign assets.

Question 36

True or False: Long-term investments generally face lower volatility compared to short-term investments.

Answer 36

True

Question 37

What is 'emerging markets investment'?

Answer 37

Investing in countries with developing economies that have the potential for rapid growth.

Question 38

What is 'hedging'?

Answer 38

A risk management strategy used to offset potential losses in investments.

Question 39

Fill in the blank: The ______ approach to portfolio construction focuses on maximizing expected returns for a given level of risk.

Answer 39

mean-variance

Question 40

What does 'total return' include?

Answer 40

Both capital gains and income received from an investment.

Question 41

Multiple Choice: Which strategy involves investing in undervalued stocks? A) Growth investing B) Value investing C) Index investing

Answer 41

B) Value investing

Question 42

What are 'alternative investments'?

Answer 42

Investments outside of traditional asset classes, such as real estate, commodities, and hedge funds.

Question 43

True or False: The efficient market hypothesis suggests that all available information is reflected in stock prices.

Answer 43

True

Question 44

What is 'liquidity risk'?

Answer 44

The risk that an investor may not be able to buy or sell an investment quickly enough to prevent a loss.

Question 45

Fill in the blank: ______ analysis helps investors evaluate the financial health of a company before investing.

Answer 45

Fundamental

Question 46

What is 'technical analysis'?

Answer 46

An analysis method that uses historical price and volume data to forecast future price movements.

Question 47

What does 'dividend yield' represent?

Answer 47

The annual dividend payment divided by the stock's current price.

Question 48

Multiple Choice: Which investment strategy focuses on short-term price movements? A) Value investing B) Day trading C) Buy and hold

Answer 48

B) Day trading

Question 49

What is 'sensitivity analysis'?

Answer 49

A technique used to determine how different values of an independent variable impact a particular dependent variable under a given set of assumptions.

Question 50

True or False: A higher beta indicates a stock is less volatile than the market.

Answer 50

False

Question 51

What is a 'mutual fund'?

Answer 51

An investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks and/or bonds.

Question 52

Fill in the blank: The ______ ratio measures the excess return per unit of risk in a portfolio.

Answer 52

Sharpe

Question 53

What is 'systematic risk'?

Answer 53

The risk inherent to the entire market or market segment, often due to economic factors.

Question 54

Multiple Choice: Which type of asset is generally the least risky? A) Stocks B) Bonds C) Commodities

Answer 54

B) Bonds

Question 55

What is 'investment policy statement'?

Answer 55

A document that outlines an investor's goals, risk tolerance, and investment strategy.