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
Which of the following is an example of a liability-driven investment (LDI) approach?
Answer: Matching asset cash flows to future pension liabilities
LDI focuses on structuring the portfolio so that asset cash flows align with the timing and magnitude of specific future liabilities, such as pension payments.
A core-satellite portfolio construction approach typically involves:
Answer: A passive core holding plus active satellite positions for alpha
Core-satellite combines a low-cost passive core (tracking the market) with smaller active satellite positions that seek to generate excess returns.
Which risk measure captures the potential loss in a portfolio under extreme but plausible market conditions?
Answer: Conditional Value at Risk (CVaR)
CVaR (also called Expected Shortfall) measures the average loss beyond the Value at Risk threshold, capturing tail risk under extreme scenarios.
When a client's time horizon shortens from 20 years to 5 years, how should their portfolio typically be adjusted?
Answer: Shift toward more fixed-income and less volatile assets
A shorter time horizon reduces the ability to recover from market downturns, so the portfolio should be shifted toward more stable, lower-risk assets.
Which portfolio construction technique uses macroeconomic forecasts to adjust asset class weights?
Answer: Tactical asset allocation
Tactical asset allocation involves making short-to-medium-term deviations from the strategic target weights based on current market views or economic forecasts.
The Sharpe ratio measures portfolio performance by comparing excess return to:
Answer: Total portfolio standard deviation
The Sharpe ratio divides the portfolio's excess return (return minus risk-free rate) by its total standard deviation, measuring return per unit of total risk.
In a mutual fund portfolio, what does 'style drift' mean?
Answer: A fund manager deviates from the fund's stated investment style or mandate
Style drift occurs when a fund manager invests in securities outside the fund's declared style (e.g., a growth fund buying deep-value stocks), misaligning investor expectations.