Stock Jobs Portfolio Management 2 — Questions and Answers
Question 1: What is the 'Sharpe ratio' used for?
- Measuring a portfolio's sensitivity to market movements
- Evaluating risk-adjusted return by comparing excess return to standard deviation (Correct answer)
- Calculating the total return of a sharp price move
- Measuring the ratio of growth to value stocks in a portfolio
Correct answer: Evaluating risk-adjusted return by comparing excess return to standard deviation
The Sharpe ratio measures risk-adjusted performance by dividing a portfolio's excess return (above the risk-free rate) by its standard deviation, allowing comparison of portfolios with different risk levels.
Question 2: What is 'passive investing' and how does it differ from active investing?
- Investing without monitoring the portfolio at all
- Tracking a market index with minimal trading, in contrast to active investing which attempts to outperform the market (Correct answer)
- Investing only in income-generating passive assets
- Letting a robo-advisor manage all investment decisions
Correct answer: Tracking a market index with minimal trading, in contrast to active investing which attempts to outperform the market
Passive investing aims to replicate market index returns through low-cost index funds or ETFs, while active investing involves stock selection and market timing attempts to beat the benchmark.
Question 3: What is a 'benchmark' in portfolio management?
- The minimum return required to cover investment fees
- A standard index or measure against which portfolio performance is evaluated (Correct answer)
- A target price for a stock set by a research analyst
- The average return of all portfolios in a fund family
Correct answer: A standard index or measure against which portfolio performance is evaluated
A benchmark is a standard, typically a market index like the S&P 500, used to measure and compare the performance of an investment portfolio.
Question 4: What is 'sector rotation' as an investment strategy?
- Replacing all stocks in a sector with different ones annually
- Moving investments between market sectors based on economic cycle stages to capture outperformance (Correct answer)
- Rotating between domestic and international sectors
- Balancing the number of stocks across all market sectors
Correct answer: Moving investments between market sectors based on economic cycle stages to capture outperformance
Sector rotation involves shifting portfolio weights between sectors as economic conditions change, since different sectors tend to outperform at different stages of the economic cycle.
Question 5: What is 'drawdown' in investment performance analysis?
- The process of withdrawing funds from an investment account
- The peak-to-trough decline in portfolio value during a specific period (Correct answer)
- The reduction in portfolio holdings when rebalancing
- The decrease in trading activity during market slowdowns
Correct answer: The peak-to-trough decline in portfolio value during a specific period
Drawdown measures the decline from a portfolio's highest point to its lowest point in a given period, used to assess the worst-case loss scenario and risk of an investment strategy.
Question 6: What is 'tax-loss harvesting' in portfolio management?
- Harvesting dividends in tax-advantaged accounts only
- Selling securities at a loss to offset capital gains taxes, then repurchasing similar investments (Correct answer)
- Waiting until year-end to realize all portfolio gains
- Moving assets to tax-free municipal bonds to reduce taxes
Correct answer: Selling securities at a loss to offset capital gains taxes, then repurchasing similar investments
Tax-loss harvesting involves strategically selling losing positions to generate capital losses that offset taxable capital gains, reducing overall tax liability while maintaining portfolio exposure.
Stock Jobs Portfolio Management 2
What is the 'Sharpe ratio' used for?