Passive and Active Portfolio Management Quiz

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

Which of the following best describes the passive portfolio management style?

Primarily focuses on stock picking and market timing

A long-term buy and hold strategy (correct)

Frequently trades to capture short-term opportunities

Actively managed to outperform the market

What is the primary method used to evaluate passive fund managers?

How well they track the target index (correct)

Their frequency of trading

Their ability to outperform the market

Their success in stock picking and timing the market

Which of these market indexes is commonly used for tracking portfolios in passive management?

S&P 500 index (correct)

Russell 2000 index

Dow Jones Industrial Average

NYSE Composite Index

What is the expected return in passive portfolio management defined as?

Rf + Risk Premium Signup and view all the answers

Why might a passive portfolio slightly underperform the target index?

Due to fees and commissions Signup and view all the answers

What distinguishes active equity portfolio managers from passive fund managers?

They seek to outperform the market Signup and view all the answers

Which investment style focuses on identifying undervalued stocks?

Value-oriented Signup and view all the answers

What is the primary goal of active portfolio management?

To outperform the market Signup and view all the answers

Why are costs involved in tracking the index?

To cover management fees and expenses Signup and view all the answers

What can cause a passive portfolio to deviate from the target index's performance?

Fees, commissions, and trading costs Signup and view all the answers

What is market capitalization?

The total value of a company's outstanding shares Signup and view all the answers

What is the main difference between full replication and sampling methods for constructing an index portfolio?

Full replication involves purchasing securities in proportion to their weight in the index, while sampling buys a representative sample of stocks with lower commissions Signup and view all the answers

What does tracking error measure in managed portfolio performance?

The difference between a managed portfolio's return and the benchmark's return in a specific period Signup and view all the answers

What is 'alpha' in the context of active management?

Returns above the market average that active managers attempt to earn Signup and view all the answers

What is the main focus of top-down fundamental strategy in active equity portfolio management?

Broad asset class and sector allocations Signup and view all the answers

What is the primary characteristic of contrarian investment strategy?

Buying stocks when most investors are bearish and selling when they are bullish Signup and view all the answers

'Factor-based investment strategies form portfolios based on specific characteristics believed to produce better risk-adjusted returns than traditional passive index funds.' Which characteristic do these strategies primarily focus on?

Earnings momentum Signup and view all the answers

'The weekend effect' and 'The January effect' are phenomena related to which aspect of stock returns?

Trends in stock returns based on historical data Signup and view all the answers

'Factor-based investment strategies' primarily focus on which type of stock characteristic?

'Earnings momentum' Signup and view all the answers

'The weekend effect' refers to which phenomenon in stock returns?

Stock returns on Mondays are often lower due to the release of bad news on Fridays Signup and view all the answers

Which market anomaly is considered by some to be evidence against the efficient markets hypothesis?

The January Effect Signup and view all the answers

What does portfolio turnover measure?

Trading activity Signup and view all the answers

What does a growth investor focus on?

EPS and its economic determinants Signup and view all the answers

What characteristics are typically associated with value stocks?

Low price/book value, low price earnings, high yield Signup and view all the answers

What is the primary focus of style analysis in investment?

Explaining variability in observed returns in terms of benchmark portfolios Signup and view all the answers

Which type of investor assumes a constant P/E ratio and focuses on EPS growth?

Growth investor Signup and view all the answers

What does the January Effect provide evidence against?

'Efficient markets hypothesis' Signup and view all the answers

What does measures of tax efficiency involve?

Determining the impact of taxes on investment returns Signup and view all the answers

'Style drift' refers to unintentional changes in what aspect of investing?

Investment style Signup and view all the answers

Which investment approach involves anticipating a market correction and focusing on improving company fundamentals?

Value investing approach Signup and view all the answers

Study Notes

Market capitalization is the product of share price and number of shares. The market index undergoes daily rebalancing, requiring fund managers to sell shares of companies that no longer belong in the index and buy shares of those that do.
Two methods for constructing an index portfolio: Full replication and sampling. Full replication involves purchasing securities in proportion to their weight in the index, ensuring close tracking but increasing transaction costs. Sampling buys a representative sample of stocks with lower commissions.
Tracking error is the difference between a managed portfolio's return and the benchmark's return in a specific period. Measured as the standard deviation of these differences, typically annualized.
Active management involves attempting to earn returns above the market average, known as "alpha." Active equity portfolio managers use fundamental and technical strategies to achieve this.
Fundamental strategies include top-down and bottom-up approaches. Top-down focuses on broad asset class and sector allocations, while bottom-up emphasizes individual securities selection.
Technical strategies include contrarian investment and price momentum. Contrarian investment involves buying stocks when most investors are bearish and selling when they are bullish. Price momentum strategy focuses on past price trends.
Factor-based investment strategies form portfolios based on specific characteristics believed to produce better risk-adjusted returns than traditional passive index funds.
Earnings momentum strategy focuses on buying stocks with accelerating earnings and selling those with disappointing earnings.
The weekend effect is a phenomenon in which stock returns on Mondays are often lower due to the release of bad news on Fridays.
The January effect is a perceived tendency for stocks to rise in January due to tax-loss harvesting and re-investment.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Test your knowledge of passive and active portfolio management styles, techniques for constructing passive index portfolios, themes used by active equity portfolio managers, and differences between value-oriented and growth-oriented investment styles.