Portfolio Management: Master the Art of Investment Diversification

Question 1

Which ethical considerations should be taken into account when managing portfolios?

Accepted Answer

Prioritizing clients' interests

Accepted Answer

Assessing the social impact of investments

Accepted Answer

Avoiding conflicts of interest

Answer

Pursuing high returns without regard to risk

Question 2

In portfolio management, the term "diversification" refers to the practice of:

Accepted Answer

Investing in a wide range of assets to reduce risk

Answer

Concentrating investments in a few high-return assets

Answer

Matching investments to investor risk tolerance

Answer

Maximizing the expected return of the portfolio

Question 3

When constructing a portfolio, which of the following is NOT a relevant consideration?

Accepted Answer

Emotional stability of the investor

Answer

Investment goals

Answer

Risk tolerance

Answer

Investment horizon

Question 4

The relationship between the expected return and risk of an investment is typically:

Accepted Answer

Positively correlated

Answer

Negatively correlated

Answer

Not correlated

Answer

U-shaped

Question 5

Which portfolio strategy is designed to provide a steady stream of income?

Accepted Answer

Income strategy

Answer

Growth strategy

Answer

Value strategy

Answer

High-yield strategy

Question 6

The formula for calculating the expected return of a portfolio is:

Accepted Answer

Expected Return = (Weight of Asset A * Expected Return of Asset A) + (Weight of Asset B * Expected Return of Asset B) + ...

Answer

Expected Return = (Total Investment / Total Assets)

Answer

Expected Return = (Risk-Free Rate + Inflation Rate)

Answer

Expected Return = (Portfolio Return / Number of Assets)

Question 7

Active portfolio management offers the potential benefit of:

Accepted Answer

Enhanced returns through skilled investment selection

Answer

Reduced investment costs

Answer

Lower risk exposure

Answer

Guaranteed portfolio growth

Question 8

The primary purpose of a portfolio review is:

Accepted Answer

To fulfill all of the above purposes

Answer

To evaluate portfolio performance

Answer

To adjust the portfolio's asset allocation

Answer

To revise portfolio objectives

Question 9

Which statement accurately describes the difference between idiosyncratic and systematic risk?

Accepted Answer

Idiosyncratic risk can be diversified, while systematic risk cannot.

Answer

Systematic risk can be diversified, while idiosyncratic risk cannot.

Answer

Both idiosyncratic and systematic risk can be diversified.

Answer

Neither idiosyncratic nor systematic risk can be diversified.

Question 10

Which numerical measure indicates the amount by which a portfolio's returns fluctuate over time?

Accepted Answer

Standard deviation

Answer

Alpha

Answer

Beta

Answer

Sharpe ratio

Question 11

Which of the following equations accurately represents the Capital Asset Pricing Model (CAPM)?

Accepted Answer

Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)

Answer

Risk = Risk-Free Rate + Beta * (Market Return - Expected Return)

Answer

Diversification = Risk-Free Rate + Alpha * (Market Return - Risk-Free Rate)

Question 12

What is the primary goal of portfolio management?

Accepted Answer

To balance risk and return through diversification

Answer

To maximize returns regardless of risk

Question 13

Diversification in portfolio management refers to:

Accepted Answer

Investing in a range of assets to reduce risk

Answer

Focusing only on high-return investments

Answer

Investing in assets with similar characteristics

Answer

Avoiding investments that fluctuate in value

Question 14

The key difference between a mutual fund and an investment trust is that:

Accepted Answer

Mutual funds are open-ended, while investment trusts are closed-ended

Answer

Investment trusts are actively managed, while mutual funds are passively managed

Answer

Investment trusts are regulated by the Financial Conduct Authority (FCA), while mutual funds are not

Answer

Mutual funds offer higher returns than investment trusts

Question 15

The Sharpe ratio is used to measure:

Accepted Answer

Portfolio performance adjusted for risk

Answer

Portfolio volatility

Answer

Portfolio correlation

Answer

Portfolio beta

Question 16

Asset allocation in portfolio management involves:

Accepted Answer

Determining the proportion of different asset classes in a portfolio

Answer

Selecting individual stocks and bonds for investment

Answer

Managing the overall risk and return of a portfolio

Answer

Monitoring and rebalancing a portfolio over time

Question 17

A type of fixed income security is:

Accepted Answer

Bond

Answer

Stock

Answer

Mutual fund

Answer

Exchange-traded fund (ETF)

Question 18

The purpose of rebalancing a portfolio is to:

Accepted Answer

Maintain the desired asset allocation

Answer

Increase portfolio returns

Answer

Reduce portfolio volatility

Answer

Lock in profits

Question 19

In portfolio management, which bias describes investors overestimating their knowledge and skills?

Accepted Answer

Overconfidence Bias

Answer

Hindsight Bias

Answer

Confirmation Bias

Question 20

What is the primary benefit of diversification?

Accepted Answer

Reduces portfolio risk

Answer

Increases potential returns

Answer

Lowers transaction costs

Answer

Simplifies portfolio management

Question 21

How does a strong positive correlation between assets impact portfolio risk?

Accepted Answer

Increases overall portfolio risk

Answer

Decreases overall portfolio risk

Answer

Reduces portfolio volatility

Answer

Has no impact on portfolio risk

Question 22

What is a key purpose of portfolio rebalancing?

Accepted Answer

To maintain target asset allocation

Answer

To protect against inflation

Answer

To maximize short-term returns

Answer

To avoid capital gains taxes

Question 23

Which of the following is a benefit of actively managed portfolios?

Accepted Answer

Potential for higher returns

Answer

Guaranteed capital preservation

Answer

Lower management fees

Answer

Reduced risk exposure

Question 24

How does the efficient market hypothesis (EMH) impact portfolio management?

Accepted Answer

Supports passive investment strategies

Answer

Guarantees higher returns

Answer

Invalidates diversification as a viable risk management strategy

Answer

Encourages frequent trading

Question 25

What is the main purpose of ethical portfolio management?

Accepted Answer

To align investments with ethical values and principles

Answer

To reduce portfolio risk and volatility

Answer

To maximize shareholder returns