Investment Strategies & Portfolio Management Flashcards

Constant Proportion Portfolio Insurance (CPPI) adjusts equity exposure based on which formula?

Answer: Equity = Multiplier × (Portfolio Value − Floor)

CPPI dynamically allocates to risky assets based on a multiple of the 'cushion' (portfolio value above the floor), protecting against breaching the floor.

Which statement about the efficient market hypothesis (EMH) is most relevant to passive investment strategies?

Answer: Weak form EMH implies prices reflect all historical data, making technical analysis ineffective

Weak form EMH holds that past price data is already reflected in current prices, making technical analysis unable to consistently generate excess returns.

A client's investment policy statement (IPS) specifies a maximum drawdown tolerance of 20%. Which portfolio construction technique most directly addresses this constraint?

Answer: Risk budgeting with drawdown limits

Risk budgeting allocates the portfolio's total risk capacity across asset classes, and can explicitly incorporate drawdown constraints into the construction process.

Which behavioral bias causes investors to hold losing positions too long and sell winning positions too soon, creating tax inefficiency and suboptimal returns?

Answer: Disposition effect

The disposition effect describes investors' tendency to 'ride' losers (hoping to break even) while quickly locking in gains from winners, a pattern rooted in prospect theory.

In a rising interest rate environment, which bond portfolio strategy would best preserve principal value?

Answer: Shortening portfolio duration

Shorter duration bonds have less price sensitivity to interest rate increases, so reducing portfolio duration helps protect principal when rates rise.

What does the information ratio (IR) measure in portfolio performance evaluation?

Answer: Active return per unit of tracking error

The information ratio measures the consistency of active management by dividing active return (alpha) by tracking error (standard deviation of active returns).

A client age 62 asks about the 'glide path' concept. What does this refer to in target-date fund investing?

Answer: The shift from aggressive to conservative allocation as the target date nears

A glide path systematically reduces equity risk and increases fixed income allocation as an investor nears and passes the target retirement date.