Portfolio Analysis Test Flashcards

What does the information ratio measure in portfolio management?

Answer: Active return relative to tracking error

The information ratio measures how consistently a portfolio manager generates active returns (above benchmark) relative to the tracking error, indicating skill versus luck.

In a liability-driven investment (LDI) strategy, what is the primary objective?

Answer: Matching or hedging future liabilities with corresponding assets

LDI strategies focus on structuring a portfolio's assets to match the duration and cash flows of future liabilities, commonly used by pension funds and insurance companies.

Which of the following best describes a 'factor model' in quantitative portfolio management?

Answer: A model that explains returns through exposure to common risk factors

Factor models (such as the Fama-French model) explain security returns as functions of exposure to systematic risk factors like market risk, size, value, and momentum.

What is 'convexity' in the context of bond portfolio analysis?

Answer: The measure of the curvature in the price-yield relationship of a bond

Convexity measures how the duration of a bond changes as interest rates change, reflecting the curvature (non-linearity) in the price-yield relationship.

In strategic asset allocation, how frequently is the target allocation typically reviewed and updated?

Answer: Periodically (e.g., annually or when long-term assumptions change)

Strategic asset allocation sets long-term target weights based on capital market assumptions and investor objectives, typically reviewed annually or when major changes in assumptions occur.

What is 'mean reversion' and how does it affect portfolio strategy?

Answer: Asset prices or returns tend to return toward their long-run historical averages

Mean reversion is the theory that asset prices or returns tend to move back toward long-run averages over time, which can inform contrarian investment strategies.