Stock Jobs Portfolio Management 1 — Questions and Answers
Question 1: What is 'asset allocation' in portfolio management?
- Choosing individual stocks within a sector
- Distributing investments across different asset classes like stocks, bonds, and cash based on goals and risk tolerance (Correct answer)
- Allocating company assets across different business units
- The process of selling underperforming assets
Correct answer: Distributing investments across different asset classes like stocks, bonds, and cash based on goals and risk tolerance
Asset allocation is the strategic decision of how to divide a portfolio among different asset classes to balance risk and reward based on an investor's time horizon and goals.
Question 2: What is 'diversification' in investing?
- Investing in a variety of different brokerage accounts
- Spreading investments across multiple assets to reduce exposure to any single investment's risk (Correct answer)
- Diversifying the currencies used to fund an account
- Changing investment strategies multiple times per year
Correct answer: Spreading investments across multiple assets to reduce exposure to any single investment's risk
Diversification reduces risk by spreading investments across different assets, sectors, and geographies so poor performance in one area does not devastate the whole portfolio.
Question 3: What is 'rebalancing' a portfolio?
- Moving all assets to higher-performing investments
- Periodically adjusting portfolio holdings back to target allocations as market movements cause drift (Correct answer)
- Replacing underperforming fund managers
- Balancing between growth and dividend stocks equally
Correct answer: Periodically adjusting portfolio holdings back to target allocations as market movements cause drift
Rebalancing restores a portfolio to its target asset allocation by buying or selling holdings that have grown or shrunk beyond desired proportions due to market movements.
Question 4: What is 'systematic risk' (also called market risk)?
- Risk caused by flaws in trading systems and technology
- Risk inherent to the entire market or economy that cannot be eliminated through diversification (Correct answer)
- Risk systematically identified and categorized in a risk register
- The risk of following a systematic trading strategy
Correct answer: Risk inherent to the entire market or economy that cannot be eliminated through diversification
Systematic risk affects the entire market and cannot be diversified away, including risks from economic recessions, interest rate changes, and geopolitical events.
Question 5: What is 'Modern Portfolio Theory' (MPT)?
- A trading framework developed for modern electronic markets
- A framework by Harry Markowitz showing how to construct portfolios to maximize return for a given level of risk (Correct answer)
- The most current approach to fundamental stock analysis
- A theory that modern markets are too complex to predict
Correct answer: A framework by Harry Markowitz showing how to construct portfolios to maximize return for a given level of risk
MPT, developed by Harry Markowitz in 1952, demonstrates that investors can construct portfolios to maximize expected return based on a given level of market risk through diversification.
Question 6: What is 'alpha' in portfolio performance measurement?
- The first letter of the Greek alphabet used to denote market risk
- The excess return of a portfolio above its benchmark index, adjusted for risk (Correct answer)
- The proportion of the portfolio invested in equities
- The annualized return of a portfolio before fees
Correct answer: The excess return of a portfolio above its benchmark index, adjusted for risk
Alpha measures the active return on an investment or portfolio above the benchmark index return, representing the value added (or subtracted) by the portfolio manager.
Stock Jobs Portfolio Management 1
What is 'asset allocation' in portfolio management?