CFA 41: Portfolio Management

Question 1

volatility

A Portfolio Perspective on Investing

Answer 1

As used in option pricing, the standard deviation of the continuously compounded returns on the underlying asset.

Question 2

diversification ratio

A Portfolio Perspective on Investing

Answer 2

The ratio of the standard deviation of an equally weighted portfolio to the standard deviation of a randomly selected security.

Question 3

modern portfolio theory (MPT)

A Portfolio Perspective on Investing

Answer 3

The analysis of rational portfolio choices based on the efficient use of risk.

Question 4

defined contribution pension plan (DC plan)

Investment Clients

Answer 4

Individual accounts to which an employee and typically the employer makes contributions, generally on a tax-advantaged basis. The amounts of contributions are defined at the outset, but the future value of the benefit is unknown. The employee bears the investment risk of the plan assets.

Question 5

defined benefit pension plan (DB plan)

Investment Clients

Answer 5

A pension plan that specifies the plan sponsor’s obligations in terms of contributions to the pension fund rather than benefits to plan participants.

Question 6

Investment Policy Statement (IPS)

Steps in the Portfolio Management Process

Answer 6

A written planning document that describes a client’s investment objectives and risk tolerance over a relevant time horizon, along with constraints that apply to the client’s portfolio.

Question 7

asset allocation

Steps in the Portfolio Management Process

Answer 7

The process of determing how investment funds should be distributed among asset classes.

Question 8

top-down analysis

Steps in the Portfolio Management Process

Answer 8

With reference to selection processes, an approach that starts with macro selection and then addresses selection of the most attractive investments within those segments.

Question 9

bottom-up analysis

Steps in the Portfolio Management Process

Answer 9

With reference to investment selection processes, an approach that involves selection from all securities within a specified investment universe, i.e. without prior narrowing of the universe on the basis of macroeconomic or overall market considerations.

Question 10

sell-side firm

Steps in the Portfolio Management Process

Answer 10

A broker or dealer that sells securities to and provides independent investment research and recommendations to investment management companies.

Question 11

buy-side firm

Steps in the Portfolio Management Process

Answer 11

An investment management company or other investor

Question 12

mutual fund

Pooled Investments

Answer 12

A professionally managed investment pool in which investors in the fund tyupically each have a pro-rata claim on the income and value of the fund.

Question 13

open-end fund

Pooled Investments

Answer 13

A mutual fund that accepts new investments money and issues addtiaional shares at a value equal to the net asset value of the fund at the time of investment.

Question 14

closed-end fund

Pooled Investments

Answer 14

A mutual fund in which no new investment money is accepted. New investors invest by buying existing shares, and investors in the fund liquidate by selling their shares to other investors.

Question 15

no-load fund

Pooled Investments

Answer 15

A mutual fund in which there is no fee for investing in the fund or for redeeming fund shares, although there is an annual fee based on a percentage of the fund’s net asset value.

Question 16

load fund

Pooled Investments

Answer 16

A mutual fund in which, in addtion to the annual fee, a percentage fee is charged to invest in the fund and/or for redemptions from the fund.

Question 17

venture capital fund

Pooled Investments

Answer 17

A fund for private equity investors that proides financing for development-stage companies.

Question 18

separately managed account (SMA)

Pooled Investments

Answer 18

An investment portfolio managed exclusively for the venefit of an invdividual or institution.

Question 19

Convertible Arbitrage (hedge fund strategy)
Pooled Investments

Answer 19

Buying such securities as convertible bonds that can be converted into shares at a fisxed price and simultaneously selling the stock short.

Question 20

Dedicated Short Bias (hedge fund strategy)

Pooled Investments

Answer 20

Taking more short positions than long positions.

Question 21

Emerging Markets (hedge fund strategy)
Pooled Investments

Answer 21

Investming in companies in emerging markets by purchasing corporate or sovereign securities.

Question 22

Equity Market Neutral (hedge fund strategy)

Pooled Investments

Answer 22

Attempting to eliminate the overall market movement by going short overvalued securities and going long a nearly equal value of undervalued securities.

Question 23

Event Driven (hedge fund strategy)

Answer 23

Attempting to take advantage of specific company events. Event-driven straties take advantage of transaction announcements and other one-time events.

Question 24

Fixed-Income Arbitrage (hedge fund strategy)

Pooled Investments

Answer 24

Attempting to profit from arbitrage opportunities in interest rate securities. When using a fixed-income arbitrage stratey, the investor assumes opposing postions in the market to take advantage of small price discrepancies while limiting interest rate risk.

Question 25

Global Macro (hedge fund strategy)
Pooled Investments

Answer 25

Trying to capture shifts between global economies, usually using derivativees on currencies or interest rates.

Question 26

Long/Short (hedge fund strategy)

Pooled Investments

Answer 26

Buying long equities that are expected to increase in value and selling short equities that are expected to decrease in value. Unlike the equity market neutral strategy, this strategy attempst to profit from market-movements, not just from identifying overvalued and undervalued equities.