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 'risk-adjusted return' and why is it used to compare investments?
Answer: A return metric that accounts for the level of risk taken to achieve it, allowing fair comparison between investments with different risk profiles
Risk-adjusted returns (using measures like Sharpe ratio, Sortino ratio) enable meaningful comparison between investments by considering how much return was generated per unit of risk. A higher absolute return means little if it required taking much greater risk.
What is the 'time-weighted rate of return' (TWR) and why is it preferred for fund manager evaluation?
Answer: A return calculation method that eliminates the distorting effect of external cash flows, making it suitable for comparing manager performance
TWR eliminates the effect of the timing and size of external cash flows (client deposits and withdrawals), which are outside the manager's control. This makes it suitable for comparing managers fairly, as required by the GIPS performance standards.
What is 'money-weighted rate of return' (MWR) and when is it most meaningful?
Answer: The return weighted by the amount of money invested — equivalent to the internal rate of return (IRR), reflecting the actual investor experience
MWR (equivalent to IRR) accounts for the size and timing of cash flows, reflecting the investor's actual experience — when they put money in or took it out. It is most meaningful for private equity and for assessing an individual client's actual portfolio performance.
What is 'portfolio rebalancing' and what triggers it?
Answer: Periodically buying and selling assets to restore target allocation weights after market drift; triggered by time intervals or threshold breaches
Rebalancing restores a portfolio to its target weights after market movements cause drift. It can be triggered by calendar (e.g., quarterly rebalancing) or by threshold (e.g., when any asset class drifts more than 5% from target). It enforces buy-low, sell-high discipline.
What is 'tail risk' in portfolio management?
Answer: The risk of extreme, rare events (in the statistical 'tails' of the return distribution) that are more frequent than normal distribution models predict
Tail risk refers to the probability of extreme outcomes (far from the average) that occur more frequently than assumed by normal distribution models. The 2008 financial crisis was a tail event. Managing tail risk involves stress testing, scenario analysis, and protective strategies.
What is 'portfolio turnover' and what are its implications?
Answer: The rate at which holdings in a portfolio are bought and sold, affecting transaction costs and potentially tax efficiency
Portfolio turnover measures how frequently a fund's holdings are replaced. High turnover generates greater transaction costs (bid-offer spreads, commissions) and potential tax inefficiencies, which reduce net returns. Low-turnover, buy-and-hold strategies typically incur lower costs.