Portfolio Construction and Design Flashcards

What is 'dollar-cost averaging' in portfolio management?

Answer: Investing fixed amounts at regular intervals regardless of price

Dollar-cost averaging involves investing fixed amounts at regular intervals, reducing the impact of volatility by buying more shares when prices are low.

Which statement best describes 'passive' portfolio management?

Answer: Tracking a benchmark index with minimal trading

Passive management aims to replicate a benchmark index's performance with minimal trading costs rather than seeking to outperform it.

What role does 'time horizon' play in portfolio design?

Answer: It determines the appropriate level of risk and liquidity needed

Time horizon determines how much risk a portfolio can take on; longer horizons generally allow for higher equity allocations and more volatility tolerance.

What is a 'benchmark' used for in portfolio management?

Answer: Measuring portfolio performance against a standard

A benchmark serves as a performance standard against which a portfolio's returns and risk can be evaluated.

Which of the following is an example of a 'constraint' in an investment policy statement?

Answer: Prohibition on investing in tobacco companies

Constraints such as ethical screens, tax considerations, or legal restrictions are documented in the investment policy statement to guide portfolio decisions.

What does 'tracking error' measure in portfolio analysis?

Answer: The deviation of a portfolio's returns from its benchmark

Tracking error measures how closely a portfolio follows its benchmark, with lower tracking error indicating closer alignment.