Investment Strategies and Portfolio Management Flashcards

What is the primary goal of portfolio diversification?

Answer: Reduce risk by spreading investments across various asset classes

Portfolio diversification is a fundamental investment strategy aimed at reducing overall investment risk. By spreading investments across different asset classes (e.g., stocks, bonds, real estate), industries, and geographies, investors can minimize the impact of poor performance from any single investment. This strategy helps to smooth out returns and protect against significant losses, as different assets react differently to market conditions.

What is the key characteristic of a growth investment strategy?

Answer: Focus on companies with high potential for capital appreciation

A growth investment strategy involves investing in companies that are expected to grow at an above-average rate compared to the overall market. These companies typically reinvest their earnings back into the business to fuel expansion, rather than paying dividends. Investors pursuing this strategy prioritize capital appreciation over current income, often accepting higher risk for potentially higher returns.

What is asset allocation in portfolio management?

Answer: Dividing investments among different asset classes

Asset allocation is the process of dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash equivalents. This strategic decision is based on an investor's risk tolerance, investment goals, and time horizon. Proper asset allocation is crucial for managing risk and optimizing returns over the long term, as different asset classes perform differently under various market conditions.

Which investment strategy involves holding assets for a long period to achieve steady growth?

Answer: Buy-and-hold strategy

The buy-and-hold strategy involves purchasing assets and holding them for an extended period, often years or decades, regardless of short-term market fluctuations. This approach aims to benefit from long-term market appreciation and compounding returns, aligning with the goal of achieving steady growth rather than quick profits or speculative trading.

What is the primary focus of a value investing strategy?

Answer: Identifying undervalued stocks with growth potential

Value investing is a strategy where investors seek out stocks that appear to be trading for less than their intrinsic value. The primary focus is on identifying companies with strong fundamentals that the market has overlooked or mispriced, believing their true worth will eventually be recognized, leading to capital appreciation and growth.

What is rebalancing in portfolio management?

Answer: Adjusting the portfolio to maintain the target asset allocation

Rebalancing is the process of realigning a portfolio's asset allocation back to its original target percentages. Over time, market movements can cause certain asset classes to grow or shrink, deviating from the desired risk-reward profile. Rebalancing involves selling assets that have grown beyond their target and buying those that have fallen below, ensuring the portfolio remains consistent with the investor's risk tolerance and financial goals.