Portfolio Management and Diversification Flashcards
6 cards from real Investment practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Portfolio Management and Diversification flashcards as text
What is unsystematic risk in investing?
Answer: Company-specific or industry-specific risk that can be reduced through diversification
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.
What is the rule of thumb known as the '100 minus age' rule used for?
Answer: Determining the percentage of a portfolio that should be invested in stocks based on age
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.
What is sector rotation in portfolio management?
Answer: Shifting investment focus among different industry sectors based on economic cycles
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.
What is liquidity risk in a portfolio?
Answer: The risk of not being able to quickly sell an investment without a significant price discount
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.
What is the purpose of a benchmark in portfolio management?
Answer: To serve as a standard against which a portfolio's performance can be measured
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.
What is an expense ratio in a mutual fund or ETF?
Answer: The annual fee charged by a fund as a percentage of assets under management
The expense ratio is the annual fee a fund charges investors, expressed as a percentage of the fund's average assets under management, covering management and administrative costs.