Investment Analysis & Portfolio Management Flashcards

What is 'Value at Risk' (VaR) used for in portfolio management?

Answer: Estimating the maximum potential loss over a specific time period at a given confidence level

VaR estimates the potential loss a portfolio could face within a defined time horizon at a specified confidence level, e.g., 95% one-day VaR of SAR 1 million.

Which investment approach focuses on selecting undervalued stocks based on fundamental analysis?

Answer: Value investing

Value investing, associated with Benjamin Graham and Warren Buffett, seeks stocks trading below their intrinsic value using fundamental analysis of financial statements.

What is the Sharpe Ratio used to measure?

Answer: Risk-adjusted return: excess return per unit of total risk (standard deviation)

Sharpe Ratio = (Portfolio Return − Risk-Free Rate) ÷ Standard Deviation. A higher Sharpe Ratio indicates better risk-adjusted performance.

What does 'alpha' represent in portfolio performance measurement?

Answer: Excess return over the benchmark after adjusting for systematic risk

Alpha measures a portfolio manager's ability to generate returns above the risk-adjusted benchmark; positive alpha indicates outperformance, negative alpha underperformance.

What is the difference between active and passive portfolio management?

Answer: Active management attempts to outperform a benchmark through security selection; passive management replicates a benchmark index

Active managers research and select securities attempting to beat the market index, while passive managers replicate an index (e.g., TASI) to match its performance at lower cost.

What is the Investment Policy Statement (IPS) used for?

Answer: Documenting a client's investment objectives, risk tolerance, constraints, and guidelines to direct portfolio management

The IPS is the foundational document for managing a client's portfolio, capturing their goals, risk profile, time horizon, liquidity needs, and legal constraints.