Investment Portfolio Management Flashcards

The primary purpose of an Investment Policy Statement (IPS) is to:

Answer: Document objectives, constraints, and guidelines

An IPS documents the investor's objectives, risk tolerance, constraints, and management guidelines.

Which factor is a constraint, not an objective, in portfolio management?

Answer: Time horizon and liquidity needs

Time horizon and liquidity needs are constraints that shape how objectives can be pursued.

Dollar-cost averaging involves:

Answer: Investing fixed amounts at regular intervals

Dollar-cost averaging invests a fixed dollar amount at regular intervals regardless of price.

A portfolio's standard deviation measures:

Answer: Total volatility of returns

Standard deviation quantifies the dispersion or total volatility of a portfolio's returns.

Active management seeks to:

Answer: Outperform a benchmark through security selection

Active management aims to beat a benchmark through security selection and timing decisions.

Which is a key advantage of passive index investing?

Answer: Lower costs and broad diversification

Passive index investing offers low costs, broad diversification, and tax efficiency.

Modern Portfolio Theory emphasizes evaluating securities based on:

Answer: Their contribution to overall portfolio risk and return

MPT evaluates each security by its contribution to the portfolio's total risk and return, not in isolation.