Chapter 15 - Introduction to the Portfolio Approach (Done)

Question 1

How can the rate of return be calculated?

Answer 1

The rate of return can be calculated in two ways: ex-ante (expected return) and ex-post (historical return).

Question 2

How is the ex-ante return calculated?

Answer 2

The ex-ante return is calculated as the expected cash flow (dividends) plus the expected capital gain, divided by the beginning value of the security.

Question 3

How is the ex-post return calculated?

Answer 3

The ex-post return is calculated as the ending value minus the beginning value, divided by the beginning value.

Question 4

What is the relationship between risk and return?

Answer 4

Securities with lower risk have lower expected returns, while securities with higher risks have higher expected returns.

Question 5

What is inflation rate risk?

Answer 5

Inflation rate risk is the risk that inflation will reduce future purchasing power and the real return on investments.

Question 6

What is business risk?

Answer 6

Business risk is the uncertainty regarding a company’s future performance, which is high when investing in specific stocks.

Question 7

What is political risk?

Answer 7

Political risk is the risk of unfavourable changes in government policies, significantly affecting companies in certain countries like China.

Question 8

What is liquidity risk?

Answer 8

Liquidity risk is the risk that an investor will not be able to buy or sell a security at a fair price quickly enough due to limited buying and selling opportunities.

Question 9

What is interest rate risk?

Answer 9

Interest rate risk is the risk that changing interest rates will adversely affect an investment, particularly high in the bond market.

Question 10

What is foreign investment risk?

Answer 10

Foreign investment risk is the risk of loss resulting from unfavourable changes in exchange rates.

Question 11

What is default risk?

Answer 11

Default risk is the risk that a company will be unable to make timely interest payments or repay loans, potentially leading to bankruptcy.

Question 12

What is systematic risk?

Answer 12

Systematic risk, or market risk, is the risk associated with investing in the overall capital market, affecting all investments.

Question 13

What is non-systematic risk?

Answer 13

Non-systematic risk is the risk specific to individual companies or industries, which can be mitigated through diversification.

Question 14

How can risk be measured?

Answer 14

Risk can be measured using standard deviation and beta. Standard deviation measures the range of possible future outcomes, while beta links the risk of individual securities or portfolios to the market as a whole.

Question 15

What is alpha in portfolio management?

Answer 15

Alpha represents the excess returns earned on a portfolio relative to the market, often credited to the skill of the advisor or fund manager.

Question 16

What are the two portfolio manager styles?

Answer 16

The two portfolio manager styles are active management and passive management.

Question 17

What is active management?

Answer 17

Active management aims to outperform a benchmark portfolio on a risk-adjusted basis, often involving frequent buying and selling of stocks.

Question 18

What is passive management?

Answer 18

Passive management replicates the performance of a specific market index without trying to beat it, often using strategies like indexing and buy-and-hold.

Question 19

What is top-down analysis?

Answer 19

Top-down analysis begins with studying broad macroeconomic factors before narrowing down to individual stocks.

Question 20

What is bottom-up analysis?

Answer 20

Bottom-up analysis focuses on individual stocks, building a portfolio based on the characteristics of those stocks.

Question 21

What is the buy-and-hold strategy?

Answer 21

The buy-and-hold strategy involves purchasing stocks and holding them over time, based on the belief that markets are efficient and securities are priced correctly.

Question 22

What is indexing in passive management?

Answer 22

Indexing involves buying and holding a portfolio of securities that matches the composition of a benchmark index.

Question 23

What is the growth style in equity management?

Answer 23

Growth managers focus on the current and future earnings of a company, looking for high growth and earnings momentum.

Question 24

What is the value style in equity management?

Answer 24

Value managers seek stocks that are perceived to be trading for less than their true or intrinsic value, often finding opportunities in overlooked or out-of-favour stocks.

Question 25

What is the sector rotation approach?

Answer 25

The sector rotation approach is a top-down strategy that analyzes the overall economy to identify the current phase of the economic cycle, focusing on industry selection rather than individual stocks.

Question 26

What are some fixed income manager styles?

Answer 26

Fixed income manager styles include term to maturity, credit quality, and interest rate anticipators. Managers may focus on bonds with different maturities, varying credit qualities, or anticipate changes in interest rates to structure their portfolios.