Portfolio Management - 9 Risk Management Strategies Flashcards
What are the various types of portfolio risk management strategies?
Diversification
Hedging
Tactical asset allocation
Market timing
Risk budgeting
Options
Which strategy is an appropriate mix of aggressive, moderate, and conservative investments could help balance the overall risk of a portfolio.
Diversification
- Since each asset class and each specific asset carries its own unique degree of risk, it may be best to diversify capital across a broad range of investments
What is a conservative strategy used to limit the investment loss by effecting a transaction that offsets
an existing position?
Hedging
Which strategy determines how
much money should be allocated to each asset class—cash, bonds, and stocks
Asset allocation
Which strategy is an active management portfolio strategy which re-balances holdings to take advantage of market prices and strengths?
Tactical asset allocation
Which strategy is the practice of trading in and out of the stock market or certain asset classes based on predictions of future price movements?
Market timing
Which portfolio allocation strategy focuses on the allocation of risk to define the weights of a portfolio?
Risk budgeting
What strategy give a contract that gives you the right to buy or sell a financial product at an agreed upon price for a specific period of time?
Options
What is the tradeoff when using diversification to manage portfolio risk?
A diversified portfolio is a trade-off between risk and return. In order for our investors to avoid unpleasant surprises, our approach is to diversify our investments with the intent of mitigating the impact of market fluctuations on their portfolio returns. Over time, this produces a smoother investment experience.
What is the tradeoff when using hedging to manage portfolio risk?
Hedgers likely must pay a premium or be otherwise willing to forego potential investment returns to shift risk.
What is the tradeoff when using tactical asset allocation to manage portfolio risk?
The tradeoff for tactical asset allocation is that you have to be more tuned into the market so you’re able to spot opportunities as they come along. It’s not as active a strategy as dynamic asset allocation but it may not appeal to an investor who wants to be largely hands-off.
What is the tradeoff when using market timing to manage portfolio risk?
Market timing is difficult because many different investors are using their own strategies and trading on their own time, so to speak. This can cause delays in markets or confusion when an otherwise clear move might present itself and makes timing difficult.
What are the trade-offs of implementing an hedging strategy?
Hedging involves a cost that tends to eat up the profit. Risk and reward are usually proportional to one other; thus, reducing risk will lead to reduced profits. For most short term traders, e.g., for a day trader, Hedging is a complex strategy to follow.
The goal of hedging isn’t to make money; it’s to protect from losses. The cost of the hedge, whether it is the cost of an option–or lost profits from being on the wrong side of a futures contract–can’t be avoided.
What are the disadvantages of hedging with future contracts?
- no control over future events
- price fluctuations
- the potential reduction in asset prices as the expiration date approaches
What are the trade-offs of implementing an options hedging strategy?
Loss potential is high for sellers: Whether you’re selling a call or a put option, you can incur a loss that’s far greater than the income you receive from the contract’s premium.
