A relatively new method in which the portfolio manager may make major changes in the proportion of funds invested in different asset classes at relatively low transaction costs involves the use of

Question

Quizplus · Accepted Answer

Equity and interest rate swaps allow portfolio managers to make changes in their asset class allocations without incurring significant transaction costs. Swaps involve an exchange of cash flows or assets between parties based on the performance of underlying assets or interest rates. For example, a portfolio manager can exchange the cash flows of a fixed-income security for the cash flows of a stock index, thus increasing their exposure to equities. Similarly, they can exchange the cash flows of a fixed-rate bond for a floating-rate bond, which can help them benefit from changes in interest rates while maintaining exposure to fixed-income assets. Swaps are generally executed through OTC markets and involve lower transaction costs compared to selling and buying securities in the open market.

A Relatively New Method in Which the Portfolio Manager May