Investment Strategies and Portfolio Management Flashcards

An investor whose portfolio lost 15% must earn approximately what percentage gain to break even?

Answer: 17.6%

After a 15% loss, the portfolio is at 85% of its original value; to return to 100%, it must gain 1/0.85 – 1 ≈ 17.6%.

Dollar-cost averaging (DCA) is most effective at reducing the average cost per unit when:

Answer: Markets are volatile and prices fluctuate significantly

DCA purchases more units when prices are low and fewer when prices are high, lowering average cost in volatile markets.

Which risk measure specifically captures the potential loss in a portfolio's worst expected outcomes over a given confidence interval?

Answer: Value at Risk (VaR)

Value at Risk estimates the maximum expected loss at a specified confidence level (e.g., 95%) over a defined time horizon.

A growth-oriented investor would typically have a higher allocation to equities because equities historically offer:

Answer: Higher long-term returns in exchange for greater short-term volatility

Equities historically outperform fixed income over long horizons but with greater short-term price swings.

In Modern Portfolio Theory, the optimal portfolio for a risk-averse investor is found at the point where:

Answer: The efficient frontier intersects the risk-free rate line (Capital Market Line tangency)

The tangency portfolio on the Capital Market Line represents the optimal risky portfolio for all investors under MPT.

Sector rotation as an investment strategy involves:

Answer: Shifting portfolio exposure toward sectors expected to outperform in the current economic cycle

Sector rotation exploits the cyclical tendency of different sectors to outperform at different stages of the economic cycle.

Jensen's alpha measures:

Answer: The excess return of a portfolio over what CAPM predicts given its beta

Jensen's alpha is the actual portfolio return minus the CAPM-expected return, indicating whether the manager added or destroyed value.