Investment Strategy Test Flashcards

A client nearing retirement wants to reduce portfolio volatility. Which asset allocation shift best fits this goal?

Answer: Shift more into investment-grade bonds and cash

Investment-grade bonds and cash reduce volatility and preserve capital for investors near retirement.

What is the primary purpose of rebalancing a portfolio?

Answer: To restore the target asset allocation after market drift

Rebalancing brings a portfolio back to its intended allocation after price changes shift the weights.

Dollar-cost averaging primarily helps an investor by:

Answer: Reducing the impact of market timing through regular fixed investments

Investing a fixed amount regularly smooths out the average purchase price over time.

Which strategy seeks to outperform a benchmark index through security selection?

Answer: Active management

Active management uses research and selection to try to beat a benchmark.

A diversified portfolio reduces which type of risk most effectively?

Answer: Unsystematic (company-specific) risk

Diversification spreads exposure so company-specific shocks have limited portfolio impact.

What does a higher Sharpe ratio indicate about an investment?

Answer: Better risk-adjusted return

The Sharpe ratio measures excess return per unit of risk, so higher is better.

A value investing strategy typically targets:

Answer: Stocks trading below their intrinsic value

Value investing seeks undervalued securities priced below estimated intrinsic worth.