Stock Advisor Portfolio Management Strategies 2 — Questions and Answers
Question 1: What is 'risk tolerance' in the context of investing?
- The maximum number of stocks in a portfolio
- An investor's ability and willingness to endure investment losses (Correct answer)
- The total fees paid to a financial advisor
- The minimum holding period for a stock
Correct answer: An investor's ability and willingness to endure investment losses
Risk tolerance describes an investor's capacity and psychological comfort with potential losses, which shapes how aggressively or conservatively they invest.
Question 2: What is a 'target-date fund'?
- A fund that only buys stocks expiring on a set date
- A fund that automatically shifts from aggressive to conservative allocation as a target retirement year approaches (Correct answer)
- A mutual fund that rebalances daily
- A bond fund maturing on a specific date
Correct answer: A fund that automatically shifts from aggressive to conservative allocation as a target retirement year approaches
Target-date funds gradually shift their asset allocation from growth-oriented to conservative as the investor approaches the specified target date, typically retirement.
Question 3: What is 'concentration risk' in a portfolio?
- Risk from holding too many small-cap stocks
- Excessive exposure to a single stock, sector, or geography (Correct answer)
- The danger of over-diversification
- Risk from holding illiquid assets
Correct answer: Excessive exposure to a single stock, sector, or geography
Concentration risk arises when a portfolio has too much exposure to a single investment, sector, or region, making it vulnerable to that specific risk.
Question 4: What is 'passive investing'?
- Investing without research
- Tracking a market index rather than actively selecting individual securities (Correct answer)
- Holding cash equivalents only
- Investing only in dividend-paying stocks
Correct answer: Tracking a market index rather than actively selecting individual securities
Passive investing involves tracking a market index through index funds or ETFs rather than actively picking stocks, typically resulting in lower fees and broad market exposure.
Question 5: What is the primary goal of 'active portfolio management'?
- Minimizing trading activity
- Outperforming a benchmark through security selection and market timing (Correct answer)
- Matching the performance of an index
- Maintaining a fixed allocation forever
Correct answer: Outperforming a benchmark through security selection and market timing
Active portfolio management aims to outperform a market benchmark through research-based security selection and tactical adjustments.
Question 6: What does 'portfolio turnover rate' measure?
- The frequency with which assets in a portfolio are replaced over a period (Correct answer)
- The ratio of gains to losses in a year
- The number of new stocks added each quarter
- Total dividends received divided by portfolio value
Correct answer: The frequency with which assets in a portfolio are replaced over a period
Portfolio turnover rate measures how frequently securities within a fund are bought and sold over a given period, with higher turnover generally indicating higher trading costs.
Stock Advisor Portfolio Management Strategies 2
What is 'risk tolerance' in the context of investing?