Constructing Investment Portfolios Flashcards
7 cards from real IFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Constructing Investment Portfolios flashcards as text
A portfolio manager wants to reduce unsystematic risk. Which strategy is most effective?
Answer: Diversifying across uncorrelated asset classes
Diversifying across uncorrelated asset classes reduces unsystematic (company-specific) risk that cannot be eliminated by holding a single security type.
Which of the following best describes the efficient frontier in portfolio construction?
Answer: The set of portfolios with the highest return for a given level of risk
The efficient frontier represents portfolios that offer the maximum expected return for each level of risk, forming the optimal trade-off curve.
A balanced mutual fund typically holds which combination of assets?
Answer: Equities and fixed-income securities
A balanced fund holds both equities and fixed-income securities to provide growth and income while moderating risk.
When constructing a client portfolio, what is the primary purpose of an Investment Policy Statement (IPS)?
Answer: To document the client's objectives, constraints, and investment guidelines
An IPS formalizes the client's goals, risk tolerance, time horizon, and constraints to guide ongoing portfolio management decisions.
Which asset class typically has the lowest correlation with Canadian equities and provides the best diversification benefit?
Answer: Canadian government bonds
Canadian government bonds typically have low or negative correlation with Canadian equities, providing the strongest diversification benefit during equity downturns.
A portfolio with a beta of 1.4 relative to the TSX Composite would be expected to:
Answer: Move 1.4% for every 1% move in the index
Beta measures sensitivity to market movements; a beta of 1.4 means the portfolio moves approximately 1.4% for each 1% change in the benchmark index.
In the context of portfolio construction, what does 'rebalancing' refer to?
Answer: Restoring a portfolio's asset allocation to its target weights
Rebalancing involves buying or selling assets to return the portfolio's actual allocation back to the originally intended target weights.