#1
What is the primary goal of investment portfolio diversification?
To minimize risk
ExplanationDiversification aims to spread risk across different assets, reducing overall portfolio risk.
#2
Which of the following is NOT a typical asset class for portfolio diversification?
Checking Account
ExplanationChecking accounts are typically not considered as an asset class for portfolio diversification due to low returns and lack of investment opportunities.
#3
What is the purpose of asset allocation in investment?
To spread risk across different asset classes
ExplanationAsset allocation aims to diversify investments across various asset classes to reduce risk and optimize returns.
#4
Which of the following is a measure of investment risk?
Beta
ExplanationBeta measures an investment's volatility compared to the overall market, indicating its risk relative to market fluctuations.
#5
Which of the following is a key benefit of diversification in investment portfolios?
Risk reduction
ExplanationDiversification reduces the overall risk of a portfolio by spreading investments across different assets, mitigating the impact of individual asset performance on the entire portfolio.
#6
What does the correlation coefficient measure in the context of asset allocation?
The relationship between two assets
ExplanationCorrelation coefficient quantifies the degree of relationship between two assets, indicating how they move in relation to each other.
#7
In modern portfolio theory, what does the efficient frontier represent?
A set of portfolios that offer the highest return for a given level of risk
ExplanationThe efficient frontier represents the optimal portfolio combinations that provide maximum return for a given level of risk or minimum risk for a given level of return.
#8
What is the purpose of rebalancing a portfolio?
To maintain desired asset allocations
ExplanationRebalancing ensures that the asset allocation remains aligned with investment goals and risk tolerance by adjusting portfolio holdings.
#9
Which of the following is a downside of over-diversification?
Increased risk
ExplanationOver-diversification can dilute returns and increase administrative costs, potentially leading to increased risk without significant benefits.
#10
In the context of asset allocation, what is a 'risk-free asset' often used for?
To serve as a benchmark for portfolio performance
ExplanationRisk-free assets, like treasury bills, are used to establish a baseline for portfolio performance evaluation and to determine the risk premium associated with other investments.
#11
Which investment strategy involves periodically rebalancing a portfolio to maintain desired asset allocations?
Buy and hold
ExplanationBuy and hold strategy involves maintaining a long-term investment position without active trading, periodically adjusting to maintain desired asset allocations.
#12
What is the purpose of using correlation analysis in portfolio management?
To determine the relationship between asset returns
ExplanationCorrelation analysis helps identify how different assets move relative to each other, aiding in constructing diversified portfolios that mitigate risk.
#13
What is the role of tactical asset allocation in portfolio management?
To exploit short-term market inefficiencies
ExplanationTactical asset allocation involves actively adjusting asset allocations to capitalize on short-term market opportunities or exploit temporary market inefficiencies.
#14
Which of the following strategies aims to capture market inefficiencies and anomalies?
Active management
ExplanationActive management involves selecting investments with the aim of outperforming the market by exploiting perceived inefficiencies or anomalies.
#15
What is the primary goal of tactical asset allocation?
To capture short-term market opportunities
ExplanationTactical asset allocation aims to take advantage of short-term market fluctuations or mispricings to enhance portfolio returns.