D.33 Portfolio development and analysis

Question 1

The process of distributing investments among different asset classes (e.g., stocks, bonds, cash) to balance risk and return based on an investor’s goals and risk tolerance.

Answer 1

Asset Allocation

Question 2

An investor’s ability and willingness to endure market fluctuations and potential losses in pursuit of financial goals.

Answer 2

Risk Tolerance

Question 3

A risk management strategy that involves spreading investments across various assets to reduce exposure to any single investment’s risk.

Answer 3

Diversification

Question 4

A measure of risk-adjusted return that calculates the excess return per unit of risk, helping investors compare different portfolios.

Answer 4

Sharpe Ratio

Question 5

A curve representing the set of optimal portfolios offering the highest expected return for a given level of risk, based on MPT.

Answer 5

Efficient Frontier

Question 6

A measure of a stock or portfolio’s volatility relative to the overall market, indicating its sensitivity to market movements.

Answer 6

Beta

Question 7

A measure of an investment’s excess return compared to its benchmark, often used to evaluate active management performance.

Answer 7

Alpha

Question 8

A short-term, active portfolio strategy that adjusts asset allocations based on market conditions to capitalize on potential opportunities.

Answer 8

Tactical Asset Allocation

Question 9

A long-term, passive investment strategy that establishes a fixed asset mix based on an investor’s goals and periodically rebalances it.

Answer 9

Strategic Asset Allocation