Unit 21: Portfolio Management Styles, Strategies, and Techniques

Question 1

Stocks (asset class)

Answer 1

based on market capitalization, value or growth, foreign equity

Question 2

Bonds (asset class)

Answer 2

based on maturities and issuers

Question 3

Cash (asset class)

Answer 3

typically the standard “risk-free rate” 13 week t-bill

Question 4

Proper asset allocation considers clients need for a combination of

Answer 4

preservation of capital, income, and growth

Question 5

Alternative investments (asset class)

Answer 5

real estate, hard assets, precious metals, commodities, collectibles, ETNs, private equity, etc. exist to reduce correlation and inflation risk

Question 6

market risk is not…

Answer 6

able to be diversified

Question 7

tactical asset allocation

Answer 7

active management, relies on timing the market, sector rotation.

Question 8

strategic asset allocation

Answer 8

passive, lower fees, mirroring a benchmark, will rebalance.

Question 9

rebalancing

Answer 9

bringing portfolio back to target allocation after positions have drifted due to market performance.
types- constant ratio plan, constant dollar plan.

Question 10

Fundamental analysis

Answer 10

the study of a business’s prospects within the context of its industry and the overall economy.

Question 11

dividend models

Answer 11

determining a stock’s present value by anticipated dividends
-applies to companies who regularly pay dividends

Question 12

a model that computes a higher current stock price is one that factors

Answer 12

growth into its calculation

Question 13

Technical Analysis

Answer 13

used to predict prices over next 4-6 weeks, analyzes trends on charts.

Question 14

support and resistance

Answer 14

support is where a stock will bottom, resistance is where a stock will plateau.

Question 15

breakout

Answer 15

is when a stocks price penetrates the resistance level.
-if you can detect breakout early, it is a good buying opportunity

Question 16

moving average

Answer 16

used to show trends in price, usually 50, 200 days.

Question 17

short interest

Answer 17

the number of shares currently sold short
-the more short interest, the more bullish the indicator, because those shares need to be bought back at some point

Question 18

odd-lot theory

Answer 18

transactions fewer than 100 shares.
-investors buying smaller amounts are typically less informed, so they are trading at the wrong times.

Question 19

growth management

Answer 19

looking for earnings momentum.
usually buying stocks with high PE, but it is justified because of the belief it will go even higher.
-however, will usually add negative correlation to hedge

Question 20

value management

Answer 20

picks stocks that have a relatively low price compared to earnings/book value. trying to buy a bargain.

Question 21

capital appreciation

Answer 21

includes growth, but also, options, speculation, futures, and event driven investing

Question 22

income

Answer 22

through either dividends or debt interest. can involve foreign securities or junk bonds.

Question 23

market capitalization portfolio management

Answer 23

number of outstanding shares * market price.
-can measure how established a company is. might not have as much upside, but can be more resilient.

Question 24

monte carlo simulation

Answer 24

uses stochastic modeling to give probabilities for various outcomes.
-can provide insight on what to do, but is only as good as its assumptions
-will consider sequencing of returns

Question 25

three bond investment strategies

Answer 25

barbell- buy short term (under 2 yrs) and long term bonds (10+ yrs)
bullet- DCA into bonds, but with maturities lined up to the event (college, retirement, etc)
ladders- inverse of bullet; bonds all bought at once with varying maturities. as they come due, you reinvest into the longer term.

Question 26

Modern Portfolio Theory

Answer 26

attempts to quantify and control the total portfolio risk.
-aims for an “optimal portfolio” which gives the client the highest return possible for a given risk tolerance.

Question 27

Capital Market Assumptions for MPT

Answer 27

-can borrow or lend at risk-free rate.
-investors are rational and evaluate in terms of expected return and variability.
-time horizon is equal for all.
-no transaction costs or taxes.
-no inflation.
-assets are infinitely divisible.
-markets are efficient and no mis-pricings exist.

Question 28

Capital Market Line

Answer 28

uses:
-expected return of the portfolio;
-risk-free rate;
-return on the market;
-standard deviation of the market;
-standard deviation of the portfolio.

Question 29

The efficient frontier

Answer 29

a curve made up of the expected return and risk coefficient. all points are the highest expected returns for a given level of risk.

Question 30

Security Market Line

Answer 30

((Market return - RF rate) * beta) + RF rate

Question 31

Efficient Market Hypothesis

Answer 31

theory that the market has priced in all info, and you can only beat the market by guessing.

Question 32

Weak form Market efficiency

Answer 32

based on past public info

Question 33

Semi-Strong form Market efficiency

Answer 33

based on past and current public info

Question 34

strong form market efficiency

Answer 34

based on all public and private info

Question 35

dollar cost averaging

Answer 35

spreading investments out over time, rather than all at once.
-cost per share for MF must figure out share amounts, cannot take average price.

Question 36

protective put

Answer 36

can hedge a long stock position against decline

Question 37

covered call

Answer 37

selling calls on stocks you own. limits gain for protection against loss.

Question 38

best way to protect against loss on a short sale

Answer 38

buy a call option