Investment Portfolio Management and Diversification 3

Question 1

What is unsystematic risk in investing?

Accepted Answer

Company-specific or industry-specific risk that can be reduced through diversification

Answer

Risk affecting the entire financial market simultaneously

Answer

The risk of investing in foreign currencies

Answer

Inflation risk that erodes purchasing power

Question 2

What is the rule of thumb known as the '100 minus age' rule used for?

Accepted Answer

Determining the percentage of a portfolio that should be invested in stocks based on age

Answer

Calculating the maximum safe withdrawal rate in retirement

Answer

Setting a limit on the number of stocks to hold in a portfolio

Answer

Estimating annual investment returns over time

Question 3

What is sector rotation in portfolio management?

Accepted Answer

Shifting investment focus among different industry sectors based on economic cycles

Answer

Moving all investments to the highest-performing stock each quarter

Answer

Rotating dividend payments among different asset classes

Answer

Replacing underperforming fund managers periodically

Question 4

What is liquidity risk in a portfolio?

Accepted Answer

The risk of not being able to quickly sell an investment without a significant price discount

Answer

The risk that interest rates will rise and lower bond prices

Answer

The risk that a company will not pay its dividends

Answer

The risk of currency fluctuations in foreign investments

Question 5

What is the purpose of a benchmark in portfolio management?

Accepted Answer

To serve as a standard against which a portfolio's performance can be measured

Answer

To set a legal limit on portfolio size

Answer

To determine the minimum investment required to open an account

Answer

To calculate the portfolio's tax liability for the year

Question 6

What is an expense ratio in a mutual fund or ETF?

Accepted Answer

The annual fee charged by a fund as a percentage of assets under management

Answer

The percentage of a fund's profits paid to investors as dividends

Answer

The ratio of growth stocks to value stocks in a fund

Answer

The percentage of assets held in cash reserves