IMC Portfolio Management Principles 4

Question 1

What is a 'mandate' in institutional investment management?

Accepted Answer

The specific investment objective, strategy, and constraints given to a fund manager by a client to guide portfolio management

Answer

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)?

Accepted Answer

The long-term target allocation to different asset classes based on a client's objectives, risk tolerance, and time horizon

Answer

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?

Accepted Answer

Growth investors target companies with high earnings growth potential; value investors target companies trading below their intrinsic value

Answer

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?

Accepted Answer

The tendency for assets that have recently performed well to continue outperforming in the near term

Answer

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?

Accepted 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

Answer

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.

IMC Practice Test

IMC Practice Test

IMC Portfolio Management Principles 4