Portfolio Management & Asset Allocation Flashcards

Under the semi-strong form of the efficient market hypothesis, which approach is expected to consistently generate excess returns?

Answer: Trading on material non-public information

Semi-strong efficiency says public information is already priced, so only non-public information could help (and is illegal if material).

In a regression of a portfolio against the market, a high R-squared indicates:

Answer: Most of the portfolio's return variation is explained by market movements

R-squared is the share of return variance explained by the benchmark or market.

A threshold (corridor) rebalancing policy triggers a trade when:

Answer: An asset class weight drifts beyond a preset band around its target

Corridor rebalancing acts only when allocations breach tolerance bands.

The Sortino ratio improves on the Sharpe ratio by using which denominator?

Answer: Downside deviation

Sortino penalizes only harmful (below-target) volatility.

A portfolio holds 60% in an asset with an expected return of 8% and 40% in an asset with an expected return of 4%. What is its expected return?

Answer: 6.4%

0.60 × 8% + 0.40 × 4% = 4.8% + 1.6% = 6.4%.

Portfolio variance for a two-asset portfolio depends on:

Answer: The weights, individual standard deviations, and correlation between the assets

Variance includes each asset's weighted variance plus a covariance term driven by correlation.

A target-date fund's glide path typically:

Answer: Gradually reduces equity exposure as the target date approaches

Glide paths de-risk over time as the investor nears the withdrawal date.