Investment Portfolio Management and Diversification

Question 1

What is diversification in investing?

Accepted Answer

Spreading investments across different asset classes to reduce risk

Answer

Investing all your money in the highest-performing stock

Answer

Changing investment strategies every month

Answer

Investing only in foreign markets

Question 2

What is asset allocation?

Accepted Answer

The strategy of distributing investments among asset categories like stocks, bonds, and cash

Answer

The process of selecting individual stocks within a portfolio

Answer

The calculation of total investment fees

Answer

A method for timing the stock market

Question 3

What does rebalancing a portfolio mean?

Accepted Answer

Adjusting the portfolio back to its target asset allocation after market movements shift the proportions

Answer

Selling all underperforming assets immediately

Answer

Moving all funds into the best-performing sector

Answer

Opening new investment accounts to spread risk

Question 4

What is systematic risk?

Accepted Answer

Market-wide risk that affects all investments and cannot be diversified away

Answer

Risk that can be eliminated through diversification

Answer

Risk associated with a single company's operations

Answer

The risk of a broker making an error on your account

Question 5

What is the Sharpe ratio used for?

Accepted Answer

Measuring a portfolio's return relative to its risk, showing risk-adjusted performance

Answer

Calculating dividend yield on a stock

Answer

Estimating future earnings of a company

Answer

Comparing bond yields across different maturities

Question 6

What is dollar-cost averaging?

Accepted Answer

Investing a fixed dollar amount at regular intervals regardless of market price

Answer

Buying stocks only when prices drop below their average historical cost

Answer

Calculating the average cost basis for tax purposes

Answer

Converting foreign currency dividends to U.S. dollars