Question 1

Growth stocks would have the following characteristics:

Accepted Answer

Growth stocks are companies that have high EPS growth potential and high profitability. Therefore, the best choice is C, which describes these characteristics. A and B are incorrect because low price/book and high price/earnings are characteristics of value stocks, not growth stocks. D is incorrect because high profitability is a characteristic of growth stocks, not low EPS growth.

Question 2

The following is an example of a fundamental active equity portfolio management strategy.

Accepted Answer

Bottom up investing is a fundamental active equity portfolio management strategy where the focus is on analyzing individual companies rather than the broader market or economy. The goal is to identify undervalued companies with strong fundamentals and growth potential. This approach involves researching financial statements, market trends, and industry competitors to make informed investment decisions.

Question 3

Which of the following statements is false?

Accepted Answer

This statement is false because an investment manager's style can be used as a basis for measuring the manager's performance relative to a benchmark. In fact, a benchmark is often used to evaluate the manager's performance against a specific investment style.

Question 4

Which of the following statements concerning active equity portfolio management strategies is true?

Accepted Answer

The goal of active equity portfolio management is to earn a portfolio return that exceeds the return of a passive benchmark portfolio (net of transaction costs) on a risk-adjusted basis. This means that the portfolio manager aims to generate returns that are higher than what could be obtained by simply investing in a passive benchmark, after adjusting for transaction costs and risk. The other statements (B, C, D, and E) are false.

Question 5

Which of the following is not considered an asset allocation strategy?

Accepted Answer

The answer of Which of the following is not considered...

Question 6

A portfolio management strategy that overweights a particular industry, relative to the benchmark portfolio, based on the next expected phase of the business cycle is called

Accepted Answer

Sector rotation is a portfolio management strategy that involves overweighting or underweighting a particular industry based on the expected phase of the business cycle. By anticipating which industries will perform well in each phase of the cycle, investors can adjust their portfolio allocations accordingly to potentially generate higher returns. Tactical asset allocation involves making short-term adjustments to a portfolio based on market conditions, while indexing involves simply replicating the performance of a benchmark index. Contrarian investing involves buying assets that are currently out of favor with the market, while bottom-up investing involves analyzing individual companies rather than focusing on macroeconomic factors.

Question 7

In equity portfolio management, tracking error occurs when

Accepted Answer

The answer of In equity portfolio management, tracking error occurs...

Question 8

Which of the following statements about investment style is false?

Accepted Answer

The answer of Which of the following statements about investment...

Question 9

Which of the following is considered a strategy for timing the market and adding value to actively managed portfolios?

Accepted Answer

The answer of Which of the following is considered a...

Question 10

The asset allocation strategy that separately examines capital market conditions and the investor's objectives and constraints is called

Accepted Answer

The answer of The asset allocation strategy that separately examines...

Question 11

Which of the following is not considered a mainstream investment style?

Accepted Answer

Value, growth, market-oriented, and small-cap are all considered mainstream investment styles, as they are commonly used and recognized by investors and financial professionals. "Benchmark," however, is not typically considered a standalone investment style. Rather, it refers to a standard against which the performance of an investment or portfolio is measured, such as the S&P 500 or other market indexes.

Question 12

A fundamental tenet of the contrarian investment strategy is the notion that

Accepted Answer

The answer of A fundamental tenet of the contrarian investment...

Question 13

Value stocks would have the following characteristics:

Accepted Answer

Value stocks are typically companies that have low price/book and low price/earnings ratios compared to their industry peers. This indicates that the stock may be undervalued and could have potential for growth in the future. High EPS growth and profitability are characteristic of growth stocks, not value stocks.

Question 14

In ____ asset allocation, the investor's risk tolerance and constraints are assumed to be constant over time. However, changes in capital market conditions result in changes in the portfolio's stock-bond mix.

Accepted Answer

This is referring to the tactical asset allocation strategy, where the investor's risk tolerance and constraints are constant, but changes in market conditions result in changes to the portfolio's mix of stocks and bonds. Strategic asset allocation, on the other hand, typically involves setting a long-term target mix of asset classes based on the investor's risk tolerance and constraints, and then periodically rebalancing to that target mix. Integrated and insured asset allocation are not commonly recognized strategies.

Question 15

A portfolio manager who uses tactical asset allocation is attempting to create alpha.

Accepted Answer

Tactical asset allocation involves actively shifting the relative weightings of asset classes in a portfolio in order to take advantage of market inefficiencies and generate excess returns, which is one way to create alpha.

Question 16

Which of the following is not a technique for constructing a passive index portfolio?

Accepted Answer

The answer of Which of the following is not a...

Question 17

Insured asset allocation is a strategy to limit investment losses by shifting funds between an existing equity portfolio and a risk-free security.

Accepted Answer

Insured asset allocation involves shifting funds between an existing equity portfolio and a risk-free security in order to limit investment losses. The risk-free security acts as a hedge against market volatility and can provide protection for the equity portfolio against downturns. This strategy is designed to help investors maintain a balanced portfolio and reduce the impact of market fluctuations on their investments.

Question 18

____ is a strategy used because the market seems to reward companies that have steady, above average earnings growth, or whose prices are rising because of market optimism.

Accepted Answer

The answer of ____ is a strategy used because the...

Question 19

Which of the following is not considered an active management strategy?

Accepted Answer

Full replication is a passive management strategy where a manager attempts to replicate the performance of a benchmark index instead of actively managing and selecting individual securities. A, B, C, and E represent active management strategies where a manager actively selects and manages securities to outperform a benchmark index.

Question 20

In ____ strategy, certain economic sectors or industries are overweighted relative to the benchmark in anticipation of the next phase of the business cycle.

Accepted Answer

The given description matches the sector rotation strategy, where the goal is to invest in sectors or industries that are expected to outperform in the upcoming phase of the business cycle. This strategy involves overweighting certain sectors or industries and underweighting others relative to the benchmark. Price momentum, earnings momentum, and return rotation refer to different factors and not necessarily tied to the business cycle.

Quiz 16: Equity Portfolio Management Strategies