Investment Analysis & Portfolio Management Flashcards

A fund manager wants to hedge a $10 million equity portfolio with a beta of 1.2 using S&P 500 futures contracts valued at $250,000 each. How many contracts should be sold?

Answer: 48

Contracts needed = (Portfolio Value × Beta) / Futures Value = ($10M × 1.2) / $250,000 = 48 contracts.

Which risk measure captures the average loss in the worst 5% of scenarios?

Answer: Conditional Value at Risk (CVaR)

CVaR (also called Expected Shortfall) measures the average loss beyond the VaR threshold in the tail of the distribution.

An analyst uses the Gordon Growth Model to value a stock. If dividends are $3, the required return is 10%, and growth is 4%, what is the intrinsic value?

Answer: $50

Gordon Growth Model: P = D1 / (r − g) = $3 / (0.10 − 0.04) = $3 / 0.06 = $50.

What is the primary purpose of rebalancing a portfolio?

Answer: Restoring target asset allocation after market movements

Rebalancing realigns the portfolio to its target allocation after price changes cause drift from the intended risk profile.

Which of the following is a characteristic of a passively managed index fund?

Answer: Low tracking error relative to the benchmark

Passive index funds aim to replicate benchmark performance, resulting in low tracking error and minimal deviations from the index.

In a rising interest rate environment, which bond portfolio strategy would best preserve value?

Answer: Reducing duration (shortening maturities)

Shorter duration portfolios are less sensitive to interest rate increases, limiting price declines when rates rise.

The Treynor ratio differs from the Sharpe ratio in that it uses which risk measure?

Answer: Beta (systematic risk)

The Treynor ratio divides excess return by beta, measuring return per unit of systematic (market) risk rather than total risk.