Investment Strategies & Portfolio Management Flashcards

Which portfolio rebalancing strategy involves selling assets that have exceeded their target allocation and buying those that have fallen below?

Answer: Threshold-based rebalancing

Threshold-based rebalancing triggers trades when an asset class drifts beyond a set percentage band from its target, maintaining intended risk exposure.

A client has a portfolio with a Sharpe ratio of 0.85 and a Treynor ratio significantly lower than peers. What does this most likely indicate?

Answer: The portfolio has low total risk but high systematic risk

A high Sharpe (total risk) but low Treynor (systematic/beta risk) ratio suggests the portfolio carries substantial beta relative to its total volatility.

The core-satellite investment approach typically uses which type of holding as the 'core' component?

Answer: Low-cost index or passive funds

The core is typically a broad, low-cost passive index fund providing market-rate returns, while satellite positions seek alpha through active management.

Which term describes the strategy of overweighting asset classes expected to outperform in the short-to-medium term while maintaining a long-term strategic allocation?

Answer: Tactical asset allocation

Tactical asset allocation (TAA) involves short-term deviations from the strategic benchmark to exploit perceived market opportunities.

A portfolio manager applies a momentum strategy. Which behavior does this strategy exploit?

Answer: Persistence of recent price trends

Momentum strategies buy recent winners and short recent losers, betting that recent price trends will continue in the near term.

What is the primary risk of a laddered bond portfolio strategy?

Answer: Reinvestment risk at prevailing rates

As bonds in a ladder mature, proceeds are reinvested at whatever interest rates prevail at that time, exposing the investor to reinvestment risk.

In the context of factor investing, which factor has been shown to provide a premium because investors demand compensation for holding illiquid assets?

Answer: Size factor

The size (small-cap) premium is partly explained by the illiquidity of small-cap stocks, for which investors require additional compensation.