Portfolio Management Flashcards

An endowment fund uses the Yale model (endowment model). What is its key distinguishing characteristic?

Answer: Large allocations to alternative investments like private equity and hedge funds

The Yale/endowment model emphasizes diversification into illiquid alternative asset classes such as private equity, real assets, and hedge funds to earn illiquidity premiums.

Which of the following strategies would be used to protect a portfolio against a decline in equity value using options?

Answer: Protective put buying

A protective put involves buying put options on held securities, providing downside protection while preserving upside participation.

In the context of fixed income portfolio management, what is 'riding the yield curve'?

Answer: Buying longer-maturity bonds and selling them before maturity as they roll to higher prices

Riding the yield curve involves buying bonds with longer maturities than the investment horizon so that, as time passes, they roll down to lower yields and higher prices in an upward-sloping yield curve environment.

A fund of funds (FoF) hedge fund structure adds an additional layer of fees. What primary benefit offsets this cost?

Answer: Access to diversification across multiple hedge fund strategies and managers

A fund of funds provides diversification across managers and strategies, reducing idiosyncratic manager risk even though it adds a second fee layer.

When the correlation between two assets increases during a market crisis, what happens to the diversification benefit of combining them?

Answer: It decreases because the risk-reduction benefit of combining them diminishes

Higher correlation reduces portfolio variance benefits; when correlations spike in crises, diversification benefits shrink precisely when they are most needed.

What does the term 'portable alpha' refer to in portfolio management?

Answer: Separating alpha generation from beta exposure and transporting alpha to any desired beta exposure

Portable alpha separates the alpha component (from an active strategy) from the market beta exposure using derivatives, allowing investors to apply alpha to any benchmark.

Which of the following best describes 'risk budgeting' in portfolio construction?

Answer: Allocating the portfolio's total risk among asset classes and strategies based on expected risk-adjusted returns

Risk budgeting allocates a portfolio's total risk capacity across positions and strategies in proportion to their expected contributions to return.