Portfolio Management Principles Flashcards
6 cards from real IMC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Portfolio Management Principles flashcards as text
What is a 'mandate' in institutional investment management?
Answer: The specific investment objective, strategy, and constraints given to a fund manager by a client to guide portfolio management
An investment mandate is the set of objectives, guidelines, and constraints provided by a client to define how their portfolio should be managed. It specifies return targets, risk limits, permitted asset classes, benchmark, and any ESG or other restrictions.
What is 'strategic asset allocation' (SAA)?
Answer: The long-term target allocation to different asset classes based on a client's objectives, risk tolerance, and time horizon
SAA is the long-term, policy-level decision on how to allocate a portfolio across asset classes. It is based on the client's investment objectives, risk tolerance, time horizon, and liability profile, and typically remains relatively stable over time.
What is the key difference between 'growth' and 'value' investment styles?
Answer: Growth investors target companies with high earnings growth potential; value investors target companies trading below their intrinsic value
Growth investors seek companies with above-average growth prospects, accepting higher valuations (P/E multiples). Value investors seek companies trading at a discount to their intrinsic value, often with lower P/E or P/B ratios, expecting the market to correct the undervaluation.
What is 'momentum' as an investment factor?
Answer: The tendency for assets that have recently performed well to continue outperforming in the near term
Momentum is the empirical observation that securities which have performed well recently tend to continue outperforming over the near term, and vice versa for recent underperformers. Momentum strategies buy recent winners and sell recent losers.
What is 'concentration risk' in a portfolio?
Answer: The risk of having too large a proportion of the portfolio in a single position, sector, or asset class, amplifying losses if that investment performs poorly
Concentration risk arises when a portfolio has excessive exposure to a single security, sector, geography, or manager. If that concentrated position suffers, it can disproportionately damage the overall portfolio, undermining diversification benefits.
What is the purpose of a 'benchmark' in portfolio management?
Answer: To provide a reference point for measuring and evaluating portfolio performance and guiding investment decisions
A benchmark (such as the FTSE All-Share or MSCI World) serves as a performance yardstick, enabling investors to evaluate whether a manager has added value through active decisions. It also defines the manager's investment universe and risk profile.