Investment Portfolio Management Flashcards

A bond's duration measures its sensitivity to changes in:

Answer: Interest rates

Duration estimates how much a bond's price changes for a given change in interest rates.

What does alpha represent in portfolio performance?

Answer: Excess return above the benchmark expected return

Alpha is the return earned beyond what the model predicts given the portfolio's risk, reflecting manager skill.

A correlation coefficient of -1 between two assets indicates:

Answer: They move in perfectly opposite directions

A correlation of -1 means the assets move in perfectly opposite directions, offering strong diversification.

Tactical asset allocation differs from strategic allocation because it:

Answer: Makes short-term shifts to exploit market opportunities

Tactical allocation temporarily deviates from strategic targets to capitalize on perceived short-term opportunities.

Value at Risk (VaR) estimates:

Answer: Potential loss over a period at a given confidence level

VaR estimates the maximum expected loss over a defined horizon at a specified confidence level.

Which investment typically offers the highest liquidity?

Answer: Money market funds

Money market funds are highly liquid and can be converted to cash quickly with minimal price impact.

A laddered bond portfolio helps manage:

Answer: Reinvestment and interest rate risk

Bond ladders stagger maturities to reduce reinvestment and interest rate risk over time.