Equity Portfolio Management Flashcards
6 cards from real CPM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Equity Portfolio Management flashcards as text
Dividend discount models (DDM) value a stock based on:
Answer: The present value of all expected future dividend payments
The DDM values a stock as the present value of its expected future dividends, discounted at the required rate of return, making it appropriate for dividend-paying companies.
Which of the following describes a long/short equity strategy?
Answer: Simultaneously buying stocks expected to outperform and short-selling stocks expected to underperform
Long/short equity strategies take long positions in stocks expected to rise and short positions in stocks expected to fall, aiming to generate returns with reduced market exposure.
The price-to-book (P/B) ratio is particularly useful for analyzing:
Answer: Financial institutions where book value reflects asset quality
The P/B ratio is most applicable to financial companies (banks, insurance firms) where the balance sheet closely represents actual asset values and book value is a meaningful metric.
Which of the following events would most likely cause a large-cap growth stock's P/E ratio to compress?
Answer: Rising interest rates that increase the discount rate applied to future earnings
P/E ratios compress when discount rates rise (often due to higher interest rates), as the present value of future earnings falls, making investors less willing to pay a high multiple.
Which equity management style is most likely to have the lowest portfolio turnover?
Answer: Long-term fundamental value investing
Long-term fundamental value investing holds stocks until they reach intrinsic value, resulting in low portfolio turnover and lower transaction costs compared to momentum or tactical strategies.
Sector rotation is an active equity strategy that involves:
Answer: Shifting portfolio weights among sectors based on where the economy is in the business cycle
Sector rotation overweights sectors expected to outperform in the current or anticipated phase of the business cycle (e.g., overweighting consumer staples during recessions) and underweights others.