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Series 66 Exam > Unit 20: Portfolio Management > Flashcards

Unit 20: Portfolio Management Flashcards

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Series 66 flashcards
1
Q

Asset allocation refers to

A

he spreading of portfolio funds among different asset classes with different risk and return characteristics.

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2
Q

What are the 3 major asset classes?

A

Stock (Equity)

Bonds (Debt)

Cash

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3
Q

Steps of the Allocation Process:

A
  1. Determine objectives and constraints
  2. Creation of the investment policy statement (IPS)
  3. Determine the asset allocation based on the IPS
  4. Capital allocation
  5. Monitor and evaluate investments
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4
Q

Portfolio diversification reduces

A

unsystematic risk

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5
Q

Tactical asset allocation refers to

A

short-term portfolio adjustments that adjust the portfolio mix between asset classes in consideration of current market conditions and investors sentiment.

Example: if the stock market is expected to do well over the near term, allocate a greater portion of the portfolio to stocks

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6
Q

Tactical asset managers are looking to

A

create positive alpha

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7
Q

Sector rotating

A

different sectors of the economy are stronger at different points in the economic cycle

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8
Q

Tactical =

A

Active portfolio management

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9
Q

Strategic asset allocation refers to

A

the proportion of various types of investments composing a long-term investment portfolio.

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10
Q

A passive portfolio managers will simply recommend

A

index funds and/or ETFs

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11
Q

Passive portfolio management seeks

A

low-cost means of generating consistent, long-term returns with minimal turnover.

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12
Q

The standard asset allocation model suggests

A

subtracting a person’s age from 100 to determine the % of the portfolio to be invested in stocks.

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13
Q

The more active the portfolio,

A

the greater the role commissions will play. Active management is more appropriate for wrap fee accounts.

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14
Q

Rebalancing should happen

A

no less than annually

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15
Q

Constant Ratio Plan

A

an investment plan that attempts to maintain the type of relationship shown in our example between debt and equity securities (or other asset classes)

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16
Q

Constant Dollar Plan

A

the goal is to maintain a constant dollar amount in stocks, moving money in and out of a money market fund when necessary

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17
Q

Buy and Hold

A

rarely trades resulting in lower transaction costs; classic passive strategy; low maintenance

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18
Q

Indexing

A

portfolios constructed to mirror the components of a particular stock index, passively managed, costs are relatively low

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19
Q

Growth style

A

focuses on stocks of companies whose earning are growing faster than most other stock and are expected to continue to do so

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20
Q

Growth managers are:

A
  • Likely to buy stocks that are on the high end of their 52-week price
  • Looking for earnings momentum
  • Look for high P/E ratios or high price-to-book ratio with little or no dividends
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21
Q

Value style

A

concentrate on undervalued or out-of-favor securities whose price is low relative to the company’s earnings or book value and whose earnings prospects are believed to be unattractive by investors and securities analysts.

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22
Q

Value managers:

A
  • Think they can find a bargain with companies that are currently operating at a loss
  • Are likely to buy stocks that are at the bottom of their 52-week price range
  • Look for low P/E ratios or low price-to-book ratio and dividends offering a reasonable yield
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23
Q

Another sign of a value stock is:

A

a large cash surplus

24
Q

Contrarian

A

an investment manager who takes positions opposite of that of other managers or in general market beliefs.

25
Q

Capital Appreciation

A

the hunt for appreciation will also involve options and/or futures, special situation stocks, IPOs, and day trading

26
Q

Income

A

focuses on generating portfolio income. When dividends on common stock offer better income opportunities than interest on debt securities, the portfolio will be overweighted in that direction

27
Q

Stochastic modeling

A

a method of financial analysis that attempts to forecast how investment returns on different asset classes vary over time by using thousands of simulations to produce distributions for carious outcomes

  • Popular form of stochastic modeling that uses computer-generating distributions is the Monte Carlo Simulation (MCS)
28
Q

What are the disadvantages of stochastic modeling?

A
  • Simplistic use of historical data

- Models that simulate the return of asset classes but not the actual assets held

29
Q

Micro-cap level

A

less than $300 mil

30
Q

Small-cap level

A

$300 mil to $2 bil

31
Q

Mid-cap level

A

$2 bil to $10 bil

32
Q

Large-cap level

A

more than $10 bil

33
Q

What are the 3 strategies used to minimize interest rate risk?

A

Barbell, Bullet, Laddering

All 3 are considered active rather than passive

34
Q

The Barbell Strategy

A

investor purchases bonds maturing on one or two years and an equal amount maturing in 10+ years with no bonds in between

35
Q

The Bullet Strategy

A

investor purchases bonds today that mature in a number of years when the funds will be needed (like when your child begins college).

As the years go on, the investor purchases more bonds all maturing in the same year - like the year your child starts college. This tends to allow the investor to capture current interest rates as they change.

bullet = target year

36
Q

The Laddering Strategy

A

bonds are all purchased at the same time but mature at different times (like the steps on a ladder).

Relatively easy way to immunize a portfolio against interest rate risk.

Will generally provide higher yields than a portfolio consisting entirely of short-term bonds

37
Q

Capital Asset Pricing Model (CAPM)

A

investment theory allowing the investor to determine an asset’s expected rate of return, a form of risk-adjusted return encapsulating how much risk the investor should assume to obtain a particular return from an investment.

The CAPM does so solely on the basis of the asset’s systemic (non-diversifiable) risk.

38
Q

Modern portfolio theory (MPT)

A

focuses on the relationships among all the investments in a portfolio.

This theory holds that specific risk can be diversified away by building portfolios of assets whose returns are not correlated.

Allows investors to reduce the risk in a portfolio while simultaneously increasing expected returns

39
Q

Risk averse investors are those with

A

a low tolerance for risk.

40
Q

One of the offshoots of the CAPM is the capital market line (CML). The CML

A

provides an expected return based on the level of risk.

41
Q

The equation for CML uses:

A

expected return of the portfolio, risk-free rate, return on the market, SD of the market, and SD of the portfolio.

Alpha and beta are not used in the CML equation.

42
Q

The goal of MPT is to

A

construct the most efficient portfolio

43
Q

An efficient portfolio is one that offers

A

the most return for a given amount of risk or the least risk for a given amount of return.

44
Q

The collection of efficient portfolios is called

A

the efficient set or efficient frontier.

45
Q

The objective for the efficient frontier is for the portfolio to

A

lie on the curve, and when it is, it is considered an optimal portfolio.

46
Q

Any portfolio that is below the curve is said to be

A

taking too much risk for too little return.

47
Q

A portfolio above the efficient frontier is:

A

impossible.

48
Q

The security market line (SML) is derived from the CML and allows us to:

A

evaluate individual securities for use in a diversified portfolio.

It determines the expected rate of return for a security on the basis of its beta and the expectations about the market and the risk-free rate.

49
Q

What is the formula for security market line (SML)?

A

(Market - RFR) x beta + RFR

to arrive at the expected return of the asset

50
Q

The efficient market hypothesis (EMH)

A

maintains that security prices adjust rapidly to new information with security prices fully reflecting all available information. This is sometimes referred to as the random walk theory.

51
Q

The random walk theory would suggest that

A

throwing darts at the stock listings is as good a method as any for selecting stocks for investment.

52
Q

Weak-Form Market Efficiency

A

current stock prices have already incorporated all historical market data and therefore historical price trends are of no value in predicting future price changes. Fundamental analysis and insider information may produce above-market returns, technical analysis is of no value.

53
Q

Semi-Strong-Form Market Efficiency

A

current stock prices not only reflect all historical price data but also reflect data from analyzing financial statements, industry, or current economic outlook. Only insider information may produce above-market returns, fundamental and technical analysis is of no value.

54
Q

Followers of the efficient market hypothesis believe that an efficient market is one that produces

A

random results.

55
Q

The purpose of dollar cost averaging is to

A

reduce the investor’s average cost to acquire a security over the buying period relative to its average price.

56
Q

An investor who owns a stock can protect against a decline in market value by

A

buying a put.

This strategy is also useful for managers of large portfolios, such as pension funds. If the portfolio consisted of large-cap stocks, a way to hedge against a down market would be to purchase put options on an index that mirrors the portfolio.

57
Q

A short seller can

A

buy calls to protect against a price rise.

The best way to hedge is to buy a call option on the stock underlying short sale. This offers full protection against loss.

Series 66 Exam (18 decks)

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