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

Unsystematic risk is unique to a specific company or industry — such as a product recall or management scandal — and can be significantly reduced by holding a diversified portfolio.

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

The '100 minus age' rule suggests investing a percentage equal to 100 minus your age in stocks, with the remainder in bonds — so a 30-year-old would hold 70% stocks and 30% bonds.

Question 3

What is sector rotation in portfolio management?

Accepted Answer

Shifting investment focus among different industry sectors based on economic cycles

Answer

Sector rotation is a strategy of moving investments between industry sectors — such as technology, healthcare, or utilities — to capitalize on different sectors that tend to outperform at different stages of the economic cycle.

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

Liquidity risk is the risk that an investor cannot sell an investment quickly at a fair price because there is insufficient market demand for the asset.

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

A benchmark, such as the S&P 500, is a reference index used to evaluate whether a portfolio's returns are meeting expectations relative to the broader market or a comparable universe of assets.

Investment Practice Test

Investment Practice Test

Investment Portfolio Management and Diversification 3