IMC Portfolio Management Principles 4 — Questions and Answers
Question 1: What is a 'mandate' in institutional investment management?
- A regulatory requirement to obtain a licence
- The specific investment objective, strategy, and constraints given to a fund manager by a client to guide portfolio management (Correct answer)
- A type of government bond
- A directive from a company board to its managers
Correct 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.
Question 2: What is 'strategic asset allocation' (SAA)?
- Short-term allocation changes to exploit market opportunities
- The long-term target allocation to different asset classes based on a client's objectives, risk tolerance, and time horizon (Correct answer)
- Allocation to strategic (large, dominant) companies
- The allocation determined by regulatory requirements
Correct 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.
Question 3: What is the key difference between 'growth' and 'value' investment styles?
- Growth investors buy bonds; value investors buy equities
- Growth investors target companies with high earnings growth potential; value investors target companies trading below their intrinsic value (Correct answer)
- Growth funds charge higher fees; value funds charge lower fees
- Growth investing is active; value investing is passive
Correct 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.
Question 4: What is 'momentum' as an investment factor?
- The speed at which a portfolio manager executes trades
- The tendency for assets that have recently performed well to continue outperforming in the near term (Correct answer)
- The total return on an investment over its holding period
- The strength of a company's competitive position
Correct 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.
Question 5: What is 'concentration risk' in a portfolio?
- The risk of having too many small positions
- 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 (Correct answer)
- The risk of holding too many different asset classes
- The risk of investing in concentrated urban property markets
Correct 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.
Question 6: What is the purpose of a 'benchmark' in portfolio management?
- To guarantee a minimum level of return
- To provide a reference point for measuring and evaluating portfolio performance and guiding investment decisions (Correct answer)
- To set the maximum fees a manager can charge
- To define the regulatory requirements for portfolio management
Correct 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.
IMC Portfolio Management Principles 4
What is a 'mandate' in institutional investment management?