Portfolio Management: Overview

Question 1

Asset allocation

Answer 1

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

Question 2

Bottom-up analysis

Answer 2

An investment selection approach that focuses on company-specific circumstances rather than emphasizing economic cycles or industry analysis.

Question 3

Buy-side firm

Answer 3

An investment management company or other investor that uses the services of brokers or dealers (i.e., the client of the sell side firms).

Question 4

Closed-end fund

Answer 4

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 5

Defined benefit pension plans

Answer 5

Plans in which the company promises to pay a certain annual amount (defined benefit) to the employee after retirement. The company bears the investment risk of the plan assets.

Question 6

Defined contribution pension plans

Answer 6

Individual accounts to which an employee and typically the employer makes contributions during their working years and expect to draw on the accumulated funds at retirement. The employee bears the investment and inflation risk of the plan assets.

Question 7

Diversification ratio

Answer 7

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

Question 8

Hedge funds

Answer 8

Private investment vehicles that typically use leverage, derivatives, and long and short investment strategies.

Question 9

Investment policy statement

Answer 9

(IPS) 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 10

Load fund

Answer 10

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

Question 11

Modern portfolio theory

Answer 11

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

Question 12

Mutual fund

Answer 12

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

Question 13

No-load fund

Answer 13

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 14

Open -end fund

Answer 14

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

Question 15

Private equity fund

Answer 15

A hedge fund that seeks to buy, optimize, and ultimately sell portfolio companies to generate profits.

Question 16

Sell-side firm

Answer 16

A broker/dealer that sells securities and provides independent investment research and recommendations to their clients (i.e., buy-side firms).

Question 17

Separately managed account

Answer 17

(SMA) An investment portfolio managed exclusively for the benefit of an individual or institution.

Question 18

Smart beta

Answer 18

Involves the use of simple, transparent, rules-based strategies as a basis for investment decisions.

Question 19

Top-down analysis

Answer 19

An investment selection approach that begins with consideration of macroeconomic conditions and then evaluates markets and industries based upon such conditions.

Question 20

Venture capital fund

Answer 20

A hedge fund that seeks to buy, optimize, and ultimately sell portfolio companies to generate profits.

Question 21

Volatility

Answer 21

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