Investment Portfolio Management Flashcards

What does the Sharpe ratio measure in a portfolio?

Answer: Risk-adjusted excess return per unit of total risk

The Sharpe ratio divides excess return over the risk-free rate by standard deviation, measuring return per unit of total risk.

Diversification primarily reduces which type of risk?

Answer: Unsystematic (specific) risk

Diversification reduces unsystematic, security-specific risk while systematic market risk remains.

In the Capital Asset Pricing Model, beta measures a security's:

Answer: Sensitivity to market movements

Beta measures a security's sensitivity to overall market movements, capturing systematic risk.

What is the main goal of strategic asset allocation?

Answer: Setting long-term target weights based on objectives and risk tolerance

Strategic asset allocation establishes long-term target weights aligned with investor goals and risk tolerance.

An efficient portfolio on the efficient frontier offers:

Answer: The highest expected return for a given level of risk

Efficient frontier portfolios provide the maximum expected return for each level of risk.

Rebalancing a portfolio involves:

Answer: Realigning weights back to target allocations

Rebalancing restores asset weights to their target allocation after market movements cause drift.

Which metric measures return per unit of systematic risk?

Answer: Treynor ratio

The Treynor ratio divides excess return by beta, measuring return per unit of systematic risk.