85. Portfolio Management: Overvew

Question 1

Portfolio perspective

Answer 1

Evaluating individual investments by their contribution to risk and return to portfolio

Question 2

Modern portfolio theory

Answer 2

Extra risk from holding single security is not rewarded with higher expected returns

Question 3

Diversification ratio

Answer 3

Risk of equally weighted n securities / Risk of single security selected randomly from the n amount

Question 4

Diversification ratio = 1

Answer 4

No diversification benefits

Question 5

Diversification ratio < 1

Answer 5

Risk-reduction benefit exists from diversification

Question 6

Limitations of diversification

Answer 6

• Equal weighted portfolios are not always the optimal ones
• Portfolio diversification works best when markets are operating normally

Question 7

Steps of Portfolio Management

Answer 7

Planning: Analysis of risk tolerance, return objectives, time, tax, liquidity, income, unique circumstances that leads to IPS
Execution: Analysis of various asset classes and allocation
Feedback: Rebalancing portfolios periodically to changing demands

Question 8

Top-down analysis

Answer 8

Examining economic conditions, forecasts and identify attractive asset classes

Question 9

Individual investors

Answer 9

• Planning for house purchase, children or retirement
• Often subject to tax benefits

Question 10

Endowment

Answer 10

Fund dedicated to providing financial support for specific purpose (ex - universities)

Question 11

Foundation

Answer 11

Fund established for charitable purposes

Question 12

Banks

Answer 12

Earn more on loans and investments than the deposit payments

Question 13

Insurance companies

Answer 13

Invest premiums to fund customer claims as they occur

Question 14

Mutual funds

Answer 14

Manage pooled funds in particular styles like index investing, growth investing

Question 15

Sovereign wealth funds

Answer 15

Pool of assets owned by governments

Question 16

Defined contribution pension plan

Answer 16

Company contributes a sum each period to retirement account

Question 17

Defined benefit pension plan

Answer 17

Make periodic payments to employees after retirement

Question 18

Full service asset managers

Answer 18

Managers that offer a variety of investment styles and asset classes

Question 19

Specialist asset managers

Answer 19

Focus on particular investment styles

Question 20

Multi-boutique

Answer 20

Holding company that includes a number of different specialist asset managers

Question 21

Active management

Answer 21

Outperform benchmark through manager skill

Question 22

Passive management

Answer 22

Replicate performance of chosen benchmark index

Question 23

Mutual funds

Answer 23

Pooled investments where each investor owns share - ownership of overall portfolio

Question 24

Open-end fund

Answer 24

Investors can buy newly issued shares - meaning they can invest additional capital

Investors may also redeem shares

Question 25

NAV (net asset value)

Answer 25

Total net value of assets in fund / Number of shares

Question 26

No-load funds

Answer 26

No additional fees for purchasing shares or for redeeming

Question 27

Load funds

Answer 27

Charge up-front fees / redemption fees or both

Question 28

Closed-end funds

Answer 28

Professionally managed money that does not take new investments / does not allow redemption of shares

Question 29

Money market funds

Answer 29

Short term debt securities and provide interest income with very low risk of change

Question 30

Bond mutual

Answer 30

Invest in fixed-income securities differentiated by maturities, credit ratings, issuers and types

Question 31

Stock mutual bonds

Answer 31

Index funds - passively managed (portfolio is constructed to match index)

Actively managed - management selects individual securities to return greater than index

Question 32

ETFs

Answer 32

Closed-end funds where purchases and sales are made in the market rather than the fund