Investment Portfolio Management and Diversification

Question 1

What is diversification in investing?

Accepted Answer

Spreading investments across different asset classes to reduce risk

Answer

Diversification involves spreading investments across various asset classes, sectors, and geographies to reduce the impact of any single investment's poor performance on the overall portfolio.

Question 2

What is asset allocation?

Accepted Answer

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

Answer

Asset allocation is the process of dividing a portfolio among major asset categories such as stocks, bonds, and cash equivalents based on an investor's goals, risk tolerance, and time horizon.

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

Rebalancing restores a portfolio to its intended asset allocation by selling overweighted assets and buying underweighted ones after market fluctuations alter the original proportions.

Question 4

What is systematic risk?

Accepted Answer

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

Answer

Systematic risk, also called market risk, affects the entire market or a large segment of it and cannot be reduced through diversification — examples include recessions and interest rate changes.

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

The Sharpe ratio measures the excess return earned per unit of risk (standard deviation), helping investors evaluate whether a portfolio's returns justify the risks taken.

Investment Practice Test

Investment Practice Test

Investment Portfolio Management and Diversification