Investment Strategies 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 Investment Strategies flashcards as text
Which strategy involves systematically selling appreciated securities to offset capital gains with capital losses, thereby reducing current tax liability?
Answer: Tax-loss harvesting
Tax-loss harvesting deliberately realizes capital losses to offset capital gains, reducing the investor's net taxable income in the current year.
In the context of Canadian mutual funds, 'distribution reinvestment' (DRIP) primarily benefits investors by:
Answer: Allowing compounding without incurring transaction fees
DRIPs allow investors to automatically purchase additional units with distributions, enabling compounding while typically avoiding brokerage commissions.
A portfolio constructed to minimize tracking error relative to a benchmark while allowing slight deviations for tax efficiency is known as:
Answer: Enhanced indexing
Enhanced indexing closely tracks a benchmark but permits small active tilts — often for tax efficiency or modest alpha — while keeping tracking error low.
Which statement about dollar-cost averaging (DCA) is most accurate in volatile markets?
Answer: DCA reduces the average cost per unit when prices fluctuate
DCA reduces average cost per unit in volatile markets because the fixed periodic investment buys more units when prices are low and fewer when prices are high.
A fund employing a 'long/short equity' strategy seeks to profit by:
Answer: Buying undervalued stocks while simultaneously selling short overvalued stocks
Long/short equity funds buy stocks expected to rise and short stocks expected to fall, aiming to generate returns independent of the overall market direction.
What is the primary purpose of using futures contracts in a 'portable alpha' strategy for a Canadian fund?
Answer: To separate beta (market exposure) from alpha (manager skill) and transfer alpha to a different asset class
Portable alpha uses derivatives to maintain desired market beta while 'porting' the active return (alpha) generated elsewhere into the target asset class.
Under the IFC framework, which characteristic distinguishes a 'market-neutral' fund from a traditional long-only equity fund?
Answer: It maintains roughly equal dollar amounts of long and short equity positions to minimize market beta
A market-neutral fund balances long and short equity exposures so that net market beta approaches zero, isolating alpha from directional market moves.