Book - Chapter 11 ST Questions Flashcards
- What major change in portfolio construction came about as the result of the work of Harry Markowitz?
Markowitz’s insight enables the astute portfolio manager to focus on selecting portfolios based on their overall risk-reward characteristics, rather than constructing portfolios from consideration of only their individual profit opportunities.
- What are the three common areas that asset allocation considers?
Most asset allocation exercises consider: timescale; acceptable level of loss; and need for income.
- Why does the efficient frontier curve flatten as it rises up the risk/return axis?
The curve will flatten as risk increases; this is because adding more risk leads to diminishing levels of additional return.
- What are the main risks taken by an investor in a UK corporate bond?
Interest rate risk, credit risk and inflation risk are the main risks, but event risk and liquidity risk should also be considered.
- What are the three main ways in which portfolio performance can be assessed?
Portfolio performance can be assessed by:
- Comparison with a relevant bond or stock market index.
- Comparison to similar funds or a relevant universe comparison.
- Comparison to a custom benchmark.
- Identify two benefits and two drawbacks of diversi1rication.
Benefits:
- It reduces the risk of any one particular investment.
- It spreads the opportunity for potential return across asset classes.
- It minimises the risk of the overall portfolio suffering a significant downturn.
- It increases the possibility of stable returns through all economic cycles.
Drawbacks:
- It does not eliminate the effects of catastrophic events on individual investments.
- It dilutes the effect of strongly performing ,constituents.
- How does strategic asset allocation link to the investment advice process?
The investment advice process should accur:ately specify the client’s requirements and risk tolerance. In theory, there is then an ideal asset allocation to which their portfolio should conform.
- Where a fixed-income manager has reduced its exposure to longer duration bonds and shortened the duration of the portfolio, this is an example of what?
Where a fixed-income manager is bearish, it may reduce its exposure to longer duration bonds and shorten the duration of the portfolio as part of tactical asset allocation approach.
- What is the order of the structured process that is involved in a top-down investment strategy?
Top down strategies involve constructing portfolios in a structured fashion that follows three stages: asset allocation; sector selection; stock selection.
What is the core underlying assumption underpinning passive management?
Indexation is undertaken on the assumption that securities markets are efficiently priced and cannot, therefore, be consistently outperformed. Consequently, no attempt is made to forecast future events or outperform the broader market.
