#1
What does investment diversification aim to achieve?
Minimize risk by spreading investments across different assets
ExplanationDiversification seeks to minimize risk by spreading investments across various assets, reducing the impact of poor performance in any single investment.
#2
Which of the following is NOT a common asset class for investment diversification?
Cryptocurrencies
ExplanationCryptocurrencies are not a traditional asset class for diversification, lacking a long history and exhibiting high volatility.
#3
What is the primary benefit of dollar-cost averaging as an investment strategy?
It reduces the impact of market volatility over time
ExplanationDollar-cost averaging mitigates market fluctuations by consistently investing fixed amounts at regular intervals, resulting in a lower average cost per share.
#4
In the context of investment, what does the term 'alpha' refer to?
The return on investment compared to a benchmark index
ExplanationAlpha measures an investment's excess return relative to a benchmark, indicating its performance independent of market movements.
#5
What is the purpose of rebalancing an investment portfolio?
To maintain the original asset allocation
ExplanationRebalancing ensures that the allocation of assets in a portfolio remains consistent with the investor's goals by adjusting holdings to their original proportions.
#6
Which of the following is a characteristic of a well-diversified investment portfolio?
It spreads investments across different asset classes
ExplanationA well-diversified portfolio allocates investments across various asset classes, reducing risk and enhancing potential returns.
#7
What does the term 'correlation' represent in investment diversification?
The degree to which investments move in relation to each other
ExplanationCorrelation measures the extent to which different investments move in sync, influencing the overall diversification and risk in a portfolio.
#8
What is the key principle behind the Modern Portfolio Theory (MPT)?
Diversifying investments to optimize returns for a given level of risk
ExplanationMPT emphasizes diversification to build portfolios that balance risk and return, aiming for optimal returns based on a chosen risk level.
#9
What is the significance of the Sharpe ratio in investment analysis?
It indicates the rate of return of an investment relative to its risk
ExplanationThe Sharpe ratio measures an investment's risk-adjusted return, providing insight into its performance relative to the level of risk undertaken.
#10
What is the primary objective of tactical asset allocation?
To make short-term adjustments to take advantage of market opportunities
ExplanationTactical asset allocation involves making timely adjustments to a portfolio's asset allocation to exploit short-term market opportunities and optimize returns.
#11
Which of the following investment strategies involves investing in assets with low correlation to traditional markets?
Alternative investments
ExplanationAlternative investments, with low correlation to traditional markets, provide diversification and help manage risk in a portfolio.
#12
What role does the risk-free rate play in the Capital Asset Pricing Model (CAPM)?
It represents the expected return of a risk-free asset
ExplanationThe risk-free rate in CAPM serves as the baseline return, reflecting the hypothetical return of a risk-free investment.