Series 65 - Ch.16: Portfolio Management Styles, Strategies, and Techniques
What is the instrument used to measure the "risk-free" rate of return?
A - 90 day Treasury bill
What does Capital Asset Pricing Model (CAPM) assume?
A - A perfect capital market. All securities are valued properly (returns plot to the SML (security market line), and there are no tax or transaction costs).
What is index investing?
A - A portfolio that mirrors the performance of a specific market. Index investors give up the opportunity to beat the market.
What would be a good description of dollar cost averaging?
A - An investor invests a set amount of money each interval to buy more shares when the prices are low and fewer share when prices are high.
What is the belief behind efficient markets?
A - Any information that could affect a stock's price is quickly reflected in its price.
What kind of investment style would be used when interest rates in market are rising and each reinvestment of an older maturing bond will generate higher interest payments?
A - Bond Laddering
What kind of style generally involves taking positions that are currently out of favor in the market place, but would incur somewhat frequent activity?
A - Contrarian Style
You calculate Cost Basis(average cost per share) by...
A - Divide the Total Investment Amount by Total # of shares acquired
What type of analysis focuses on economic, industry, and business conditions?
A - Fundamental Analysis
What kind of stocks would be associated with a company that plows their earnings back into further product development?
A - Growth Stocks
Growth Stock characteristics are...
A - High price/earning ratio; High price-to-book ratio; low dividend payout
What are two very low-cost ways of investing or have low transaction costs?
A - Indexing and Buy & Hold
What are key assumptions of the Capital Asset Pricing Model (CAPM)?
A - Investors hold diversified portfolios; Investors can borrow and lend at the risk-free rate
What is the belief behind the Random Walk Theory?
A - Market movements are unpredictable
These type of stocks have a great potential for growth, may be subject to business risk, and are often thinly traded with low liquidity...
A - Micro-cap stocks
What kind of stocks represent younger, less-established companies?
A - Micro-cap stocks
Internal Rate of Return (IRR) is NOT a component of...
A - Modern Portfolio Theory (MPT) capital asset pricing model, feasible set, and efficient set are though
What investment analysis tool can be used more efficiently to predict the probability of outcomes of portfolio performance recognizing that variables such as holding periods and rates of return are generally uncertain?
A - Monte Carlo Analysis
What uses simulations to predict the probability of portfolio performance in light of multiple and uncertain variable conditions?
A - Monte Carlo analysis
Indexing and Buy & Hold are what type of strategies?
A - Passive (strategic)
What type of allocation style has relatively low transaction costs?
A - Passive styles, such as buy & hold; index
The management style that is most similar to buy and hold is...
A - Passive/Strategic management
A portfolio manager who is engaging in rebalancing on a semiannual basis is most likely using which portfolio management style?
A - Passive/strategic asset allocation
What is the CAPM calculation for expected return?
A - Risk free rate + stock's beta (expected return - risk free rate) You multiply the beta by the difference between ER and RF. Then add it to the risk free rate.
What is the practice of changing investment emphasis based on patterns to the business cycle?
A - Sector Rotation
What kind of asset allocation will incur the highest transaction cost?
A - Tactical Asset Allocation (Active)
What type of analysis focuses on price patterns?
A - Technical Analysis
What is it called when it is believed that all market participants have equal access to information?
A - The efficient market hypothesis
What kind of stock has low price-to-book, low price-to-earnings ratio?
A - Value Stock
A portfolio manager, putting most of his focus on the financial statements of the companies he is analyzing , is most likely using which management style?
A - Value style
Dollar cost averaging results in...
A - a lower average cost per share, provided the share price fluctuates and the same number of dollars is invested at each interval (monthly)
An investor's cost basis is their...
A - average cost per share
Investors in passive investment management do not associate goals with...
A - beating the market.
Dollar cost averaging involves...
A - investing a set amount of money each interval.
Investing in a broad market index funds and ETFs is generally considered to be a ....
A - passive management style Why? Indexing is part of this style
Because the passive (strategic) style of investing does not involve frequent trading, periodically the portfolio will need to be...
A - rebalanced. This insures that the asset mix is at the desired level
What does the Efficient Market Hypothesis argue?
A - that analysis itself has little, if any, value
An efficient portfolio is one that offers...
A - the least risk for a given amount of return
Under Modern Portfolio Theory (MPT), the optimal portfolio has...
A - the most return for a given amount of risk.
The purpose of portfolio rebalancing is used to make sure that...
A - the percentage of the portfolio invested in various assets remains constant.
What is a company's market capitalization (or market cap)?
A - the price per share multiplied by the number of shares outstanding.
What opportunity do index investors give up?
A - to beat the market
What is the goal of modern portfolio theory (MPT)?
A - to construct the most efficient portfolio
This type of strategy calls for active trading of a portfolio and will likely incur the highest transaction costs...
A- Tactical Allocation Strategy
