IMC Portfolio Management 2

Question 1

What is 'tracking error' in the context of fund management?

Accepted Answer

The standard deviation of the difference between a fund's return and its benchmark return

Answer

The difference between a fund's return and the risk-free rate

Answer

The total return of the fund over a given period

Answer

The maximum drawdown experienced by the fund

Question 2

An investment manager is described as having a 'top-down' approach. What does this mean?

Accepted Answer

The manager starts with macroeconomic and sector analysis before selecting individual holdings

Answer

The manager selects individual securities based on company fundamentals

Answer

The manager only invests in the largest companies by market capitalisation

Answer

The manager follows a quantitative rules-based strategy

Question 3

Which of the following best describes 'strategic asset allocation'?

Accepted Answer

The long-term target mix of asset classes based on an investor's objectives and risk tolerance

Answer

Short-term tactical shifts to exploit market opportunities

Answer

The process of selecting individual securities within an asset class

Answer

A strategy of investing equal amounts in all available asset classes

Question 4

What does Jensen's alpha measure?

Accepted Answer

The excess return of a portfolio above what CAPM predicts for its level of systematic risk

Answer

The total return of a portfolio

Answer

The correlation between a portfolio and the market

Answer

The standard deviation of portfolio returns

Question 5

In portfolio construction, what is the purpose of correlation analysis between asset classes?

Accepted Answer

To understand how assets move relative to each other and optimise diversification benefits

Answer

To identify the asset class with the highest expected return

Answer

To calculate the exact future return of each asset class

Answer

To determine the credit quality of bond holdings

Question 6

What is a 'model portfolio' as used by UK wealth managers?

Accepted Answer

A pre-defined asset allocation template that can be applied consistently across multiple client accounts

Answer

A portfolio that is theoretically perfect but cannot be implemented in practice

Answer

A portfolio consisting only of tracker funds

Answer

A portfolio designed exclusively for high-net-worth clients