Passive Portfolio Management Strategies
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Questions and Answers

What is the primary objective of passive portfolio managers?

  • To select securities based on their market capitalization
  • To focus on a specific sector or industry
  • To outperform the benchmark
  • To replicate the return of the benchmark as closely as possible (correct)

    • Which of the following is a characteristic of passive portfolio management?

  • Frequent buying and selling of securities
  • High transaction costs
  • Lower management expense ratios (MERs) (correct)
  • Higher returns than actively managed funds

    • What is the underlying theory behind passive investment strategy?

  • The Efficient Market Hypothesis (EMH) theory (correct)
  • The Modern Portfolio Theory
  • The Capital Asset Pricing Model
  • The Random Walk Theory

    • How do passive portfolio managers achieve their investment objectives?

    <p>By purchasing the exact same securities as the benchmark</p> Signup and view all the answers

    What is the purpose of a benchmark in passive portfolio management?

    <p>To measure the performance of an investment</p> Signup and view all the answers

    What happens to the frequency of trading within a mutual fund using a passive investment strategy?

    <p>It decreases significantly</p> Signup and view all the answers

    Why do passive portfolio managers not attempt to find mis-priced securities?

    <p>Because the Efficient Market Hypothesis (EMH) theory states that market prices reflect all publicly available information</p> Signup and view all the answers

    How often do passive portfolio managers need to rebalance their portfolios?

    <p>Rarely, only when the make-up of the underlying benchmark changes</p> Signup and view all the answers

    What is the effect of the dividend payment in scenario 1?

    <p>Increases the end value by $40</p> Signup and view all the answers

    What is the unrealized capital loss in scenarios 3 and 4?

    <p>$300</p> Signup and view all the answers

    Why is the end value of scenario 5 higher than scenario 6?

    <p>Because of the dividend payment in scenario 5</p> Signup and view all the answers

    What happens to gains or losses until the securities are sold?

    <p>They are unrealized</p> Signup and view all the answers

    Why are mutual fund investors interested in performance?

    <p>Both A and B</p> Signup and view all the answers

    What happens to the prices of securities when the markets are open for trading?

    <p>They fluctuate</p> Signup and view all the answers

    What is the end value of the portfolio in scenarios 3 and 4?

    <p>$700</p> Signup and view all the answers

    What does the dividend payment in scenario 3 do to the loss?

    <p>Recovers some of the loss</p> Signup and view all the answers

    What is the annual interest income from a $1,000 bond that pays 5% per annum?

    <p>$55</p> Signup and view all the answers

    In scenario 2, why does the portfolio value decrease to $1,030?

    <p>The bond drops in value</p> Signup and view all the answers

    If you sell the bond in scenario 2, what would your capital loss be?

    <p>$20</p> Signup and view all the answers

    What is the value of the bond in scenario 3?

    <p>$1,010</p> Signup and view all the answers

    Which scenario results in a portfolio increase tempered by a drop in bond prices?

    <p>Scenario 2</p> Signup and view all the answers

    What happens to the portfolio value in scenario 3?

    <p>It increases</p> Signup and view all the answers

    If you keep the bond in scenario 2, what type of capital loss is incurred?

    <p>Unrealized capital loss</p> Signup and view all the answers

    What is the total value of the portfolio at the end of one year in scenario 1?

    <p>$1,050</p> Signup and view all the answers

    What does Modern Portfolio Theory suggest about evaluating investments?

    <p>Investments should be evaluated in relation to other types of investments.</p> Signup and view all the answers

    How does diversifying a portfolio impact risk and return?

    <p>It reduces risk within the portfolio and can enhance potential return.</p> Signup and view all the answers

    What does the Efficient Frontier represent in relation to portfolio construction?

    <p>Portfolios providing the highest return for a given amount of risk.</p> Signup and view all the answers

    Why is it beneficial to combine bonds with equities in a portfolio?

    <p>Combining them reduces the overall volatility of the portfolio.</p> Signup and view all the answers

    How does Modern Portfolio Theory define the optimal portfolio?

    <p>One that offers the highest return at the lowest risk level.</p> Signup and view all the answers

    Why do investors need to diversify their portfolios according to Modern Portfolio Theory?

    <p>To reduce the overall risk within their portfolios.</p> Signup and view all the answers

    How does the combination of bonds and equities help in portfolio protection?

    <p>It reduces the portfolio's overall volatility and protects against large losses.</p> Signup and view all the answers

    Why is it crucial to understand the concept of the Efficient Frontier?

    <p>To locate portfolios providing optimal returns for risk levels.</p> Signup and view all the answers

    What type of investment strategy does Donna use to pick securities for the mutual fund?

    <p>Top-down strategy</p> Signup and view all the answers

    What macroeconomic variables do portfolio managers look at when making investment decisions?

    <p>Gross Domestic Product (GDP), interest rates, employment rates</p> Signup and view all the answers

    Which country does Donna identify as having a robust economy with good growth prospects?

    <p>Germany</p> Signup and view all the answers

    What are the strongest economic sectors identified by Donna in Germany?

    <p>Banking and steel</p> Signup and view all the answers

    Which of the following companies did Donna identify as the best prospect in the banking sector?

    <p>Commerzbank</p> Signup and view all the answers

    What data does Donna study to assess the overall health of various countries?

    <p>Gross national product (GNP), unemployment, inflation</p> Signup and view all the answers

    In addition to Germany, which other country does Donna consider for investment based on their economic conditions?

    <p>Donna only focuses on Germany</p> Signup and view all the answers

    What is the first step Donna takes when employing her investment strategy?

    <p>Look at the overall health of various countries</p> Signup and view all the answers

    Study Notes

    Modern Portfolio Theory

    • Evaluates investments in relation to other investments, not just on their own characteristics
    • Diversifying a portfolio can reduce overall risk and enhance potential returns
    • Combining bonds and equities can reduce volatility and protect against large losses

    Efficient Frontier

    • Mathematical framework for constructing a diversified portfolio
    • Determines the optimal portfolio, which provides the highest return for a given level of risk
    • Multiple optimal portfolios exist, plotted on a graph called the efficient frontier
    • Each portfolio on the efficient frontier provides the highest return for a given amount of risk

    Passive Portfolio Management

    • Manages a portfolio according to a specific benchmark (e.g. S&P/TSX composite index)
    • Goal is to replicate the return of the benchmark, not to outperform it
    • Reduces trading and transaction costs, resulting in lower management expense ratios (MERs)
    • Based on the Efficient Market Hypothesis (EMH) theory, which states that market prices reflect all publicly available information

    Calculating Mutual Fund Performance

    • Investors evaluate performance to measure current investment values and compare potential new investments
    • Example: Bond purchase with interest income and changing prices affects end value of portfolio
    • Unrealized capital losses/gains occur until securities are sold

    Portfolio Manager's Strategy

    • Analyzes macroeconomic variables (GDP, interest rates, employment rates) to identify favorable industries/sectors/countries
    • Selects companies with the most potential, meeting the mutual fund's investment objectives
    • Example: Top-down investment strategy to pick securities for a mutual fund

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    Related Documents

    Canadian Investment Funds Course Portfolio Management PDF

    Description

    Learn about passive portfolio management strategies where portfolio managers choose securities according to a specific benchmark, such as a stock index like S&P/TSX composite index. Understand how passive managers aim to replicate the benchmark's performance rather than outperform it.

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