Lecture 1

Question 1

What is Investment Management (IM)?

Answer 1

Investment management includes researching ideas, forecasting exceptional returns, constructing and implementing portfolios, and refining their performance.

Question 2

What are the differences between active and passive management?

Answer 2

Active Management:
Involves a manager aiming to beat the market through security analysis. Higher fees, higher risk, potential “alpha.”

Passive Management:
Tracks a benchmark with minimal stock picking. Lower fees, focused on “beta.”

Question 3

What are “Top-Down” and “Bottom-Up” investment approaches?

Answer 3

Top-Down:
Focuses on asset allocation starting from macroeconomics down to individual securities.

Bottom-Up:
security selection based on valuation and attractiveness before asset allocation.

Question 4

What are the primary asset classes?

Answer 4

1. Money Market: Short-term, highly liquid instruments (e.g., Treasury Bills).
2. Bond Market: Long-term debt with fixed income (e.g., Treasury Bonds).
3. Equity Market: Ownership in companies (e.g., Common Stock).
4. Derivatives Market: Contracts like options and futures.

Question 5

How is risk in investment measured?

Answer 5

Variance and Standard Deviation:
Measure dispersion of returns around the mean.

Alternative Measures:
Include skewness (asymmetry) and kurtosis (fat tails).

Question 6

What is efficient diversification?

Firm Speficic

Answer 6

Diversify across assets to minimize risk specific to any single firm, focusing on a portfolio’s systematic risk.

Question 7

What are different order types in the financial markets?

Answer 7

Market Order: Executes immediately at current price.

Limit Order: Executes only at a specified price.

Stop Order: Executes once the price crosses a threshold.

Question 8

What is the Sharpe Ratio?

Answer 8

The Sharpe Ratio measures the reward per unit of risk, comparing the return of an investment to its volatility.

Question 9

What are the common return metrics?

Answer 9

Arithmetic Return: Simple average of returns.

Geometric Return: Accounts for compounding.

Logarithmic Return: Useful for time-additive calculations.

Question 10

Efficient Markets Hypothesis (EMH)

Answer 10

EMH suggests that asset prices reflect all available information, making it difficult to consistently outperform the market.

Question 11

How do hedge funds differ from traditional funds?

Answer 11

Hedge funds often use leverage, derivatives, short selling, and complex strategies to achieve high-risk, high-return profiles.