IAR Portfolio Management 2

Question 1

Which portfolio management approach attempts to replicate the performance of a market index rather than outperform it?

Accepted Answer

Passive management

Answer

Passive management (indexing) seeks to match index returns with minimal trading, based on the belief that markets are efficient and consistent outperformance is difficult.

Question 2

A client invests a fixed dollar amount in a mutual fund every month regardless of price. This strategy is known as:

Accepted Answer

Dollar-cost averaging

Answer

Dollar-cost averaging involves investing a fixed amount at regular intervals, automatically buying more shares when prices are low and fewer when prices are high.

Question 3

The Capital Market Line (CML) represents the risk-return trade-off for portfolios that combine:

Accepted Answer

The risk-free asset and the market portfolio

Answer

The CML shows the expected return of efficient portfolios formed by combining the risk-free asset with the market portfolio, plotted against standard deviation.

Question 4

When two assets have a correlation coefficient of -1.0, combining them in a portfolio will:

Accepted Answer

Potentially eliminate all portfolio risk at a certain weighting

Answer

A perfect negative correlation of -1.0 means the assets move in exactly opposite directions, and there exists a weighting that produces a portfolio with zero variance.

Question 5

Duration is a measure used primarily to assess which type of portfolio risk?

Accepted Answer

A fixed-income portfolio's sensitivity to interest rate changes

Answer

Duration measures how much a bond or bond portfolio's price will change in response to a change in interest rates; higher duration means greater interest rate sensitivity.

IAR Practice Test

IAR Practice Test

IAR Portfolio Management 2