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 scenarios best illustrates the concept of 'sequence of returns risk'?
Answer: A retiree experiences poor early returns while making withdrawals, depleting capital faster
Sequence of returns risk is most damaging in retirement when early poor performance combined with withdrawals permanently reduces the portfolio base, limiting recovery even if later returns improve.
A portfolio manager is evaluating two funds with identical returns. Fund A has a Sharpe ratio of 0.9 and Fund B has a Sharpe ratio of 0.6. What can be concluded?
Answer: Fund A is more efficient — it earned more return per unit of risk
A higher Sharpe ratio means better risk-adjusted performance; Fund A generated the same return with less total volatility, making it the more efficient portfolio.
Which of the following is an example of a quantitative constraint that might appear in an Investment Policy Statement?
Answer: No single equity position shall exceed 5% of the total portfolio
A maximum position size limit (e.g., 5% cap per holding) is a specific, measurable constraint that restricts concentration risk in the IPS.
In portfolio construction, what is the main purpose of including alternative investments such as infrastructure or private equity?
Answer: To provide return streams with low correlation to traditional stocks and bonds
Alternatives often have low correlation with public equities and bonds, providing diversification and potentially improving the portfolio's overall risk-adjusted return.
A client's liquidity constraint means a portfolio manager should:
Answer: Ensure sufficient liquid assets are available to meet near-term cash needs
A liquidity constraint requires the manager to maintain enough easily sellable assets to fund the client's anticipated cash outflows without forced selling at a loss.
Which of the following best describes 'dollar-cost averaging' as a portfolio construction technique?
Answer: Investing a fixed dollar amount at regular intervals regardless of market price
Dollar-cost averaging involves committing a fixed amount at regular intervals, automatically purchasing more units when prices are low and fewer when prices are high.
When a Canadian investor holds foreign equities in a non-registered account, which additional risk factor must be considered in portfolio construction?
Answer: Currency (foreign exchange) risk
Foreign equity holdings expose non-registered account investors to currency risk, as fluctuations in the CAD relative to foreign currencies affect the Canadian-dollar value of returns.