Investment Strategies Flashcards
7 cards from real AAMS practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Investment Strategies flashcards as text
Which fixed-income strategy involves purchasing bonds with various maturities spread evenly across a time horizon to manage reinvestment risk?
Answer: Bond ladder
A bond ladder staggers maturities evenly, so proceeds from maturing bonds are reinvested periodically, smoothing reinvestment rate risk.
When interest rates are expected to fall significantly, which bond strategy is most likely to produce the highest total return?
Answer: Extending portfolio duration to maximize price appreciation
Longer-duration bonds exhibit greater price sensitivity to falling rates, so extending duration amplifies capital gains when rates decline.
A covered call strategy on an existing stock position generates premium income but:
Answer: Caps the upside potential above the strike price
Writing covered calls caps gains above the strike price because the shares may be called away, limiting upside participation.
In the context of alternative investments, what distinguishes a hedge fund's use of 'absolute return' from traditional benchmarked strategies?
Answer: Absolute return funds seek positive returns regardless of market direction
Absolute return strategies aim for positive performance in any market environment, rather than measuring success relative to a market benchmark.
Which portfolio construction technique minimizes variance for a given level of expected return, producing the efficient frontier?
Answer: Mean-variance optimization
Mean-variance optimization, developed by Markowitz, finds the minimum-variance portfolio for each level of expected return to map the efficient frontier.
An investor uses a 'portable alpha' strategy by overlaying an alpha-generating hedge fund position on top of a passive index exposure. The net result is:
Answer: Market beta from the index plus alpha from the active overlay
Portable alpha separates alpha generation from beta exposure, layering the hedge fund's excess return on top of an index's market return.
Which risk measure captures the average loss in the worst X% of scenarios, making it more sensitive to tail risk than Value at Risk (VaR)?
Answer: Conditional Value at Risk (CVaR) / Expected Shortfall
CVaR (Expected Shortfall) averages losses beyond the VaR threshold, providing a more complete picture of tail risk than VaR alone.