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Questions and Answers
What is the primary function of a stock exchange?
What type of stock exchange is the NYSE an example of?
Who facilitates buying and selling of shares on behalf of clients?
What is the primary objective of portfolio management?
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What is the process of periodically adjusting the portfolio to maintain target allocations?
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What is the key characteristic of an order-driven market?
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What is the main role of listed companies in a stock exchange?
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What is the primary goal of asset allocation in portfolio management?
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What type of market is characterized by trades executed based on prices quoted by market makers?
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What is the first step in the portfolio management process?
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Study Notes
Stock Exchanges
Definition and Functions
- A stock exchange is a marketplace where publicly held companies' shares are traded
- Primary function: enabling companies to raise capital by issuing new shares
- Secondary function: providing a platform for investors to buy and sell existing shares
Types of Stock Exchanges
- Primary Exchanges: where companies list and trade their shares for the first time (e.g., NYSE, NASDAQ)
- Secondary Exchanges: where existing shares are traded (e.g., regional exchanges, over-the-counter markets)
Key Players
- Brokerages: facilitate buying and selling of shares on behalf of clients
- Investors: individuals, institutions, and organizations that buy and sell shares
- Listed Companies: companies whose shares are traded on the exchange
Trading Mechanisms
- Order-driven market: trades executed based on buyer and seller orders (e.g., limit orders, market orders)
- Quote-driven market: trades executed based on prices quoted by market makers
Portfolio Management
Definition and Objectives
- Portfolio management: the process of creating and managing a collection of investments (stocks, bonds, etc.) to achieve specific financial goals
- Objectives:
- Maximize returns
- Minimize risk
- Meet investor's goals and constraints
Portfolio Management Process
- Portfolio construction: selecting assets to include in the portfolio
- Asset allocation: determining the proportion of each asset class in the portfolio
- Portfolio rebalancing: periodically adjusting the portfolio to maintain target allocations
- Performance measurement: evaluating the portfolio's returns and risk
Portfolio Management Strategies
- Active management: actively selecting securities and timing market movements to beat the market
- Passive management: tracking a market index to match its performance
- Hybrid management: combining active and passive management approaches
Risk Management Techniques
- Diversification: spreading investments across asset classes and industries to reduce risk
- Hedging: using derivatives to reduce exposure to specific risks
- Asset allocation: adjusting the portfolio's asset mix to manage risk
Stock Exchanges
Definition and Functions
- A stock exchange is a marketplace for publicly held companies' shares to be traded, enabling companies to raise capital and providing a platform for investors to buy and sell existing shares.
Types of Stock Exchanges
- Primary exchanges are where companies list and trade their shares for the first time, such as the New York Stock Exchange (NYSE) and NASDAQ.
- Secondary exchanges are where existing shares are traded, including regional exchanges and over-the-counter markets.
Key Players
- Brokerages facilitate buying and selling of shares on behalf of clients.
- Investors, including individuals, institutions, and organizations, buy and sell shares.
- Listed companies are those whose shares are traded on the exchange.
Trading Mechanisms
- In an order-driven market, trades are executed based on buyer and seller orders, including limit orders and market orders.
- In a quote-driven market, trades are executed based on prices quoted by market makers.
Portfolio Management
Definition and Objectives
- Portfolio management involves creating and managing a collection of investments to achieve specific financial goals, with objectives including maximizing returns, minimizing risk, and meeting investor goals and constraints.
Portfolio Management Process
- Portfolio construction involves selecting assets to include in the portfolio.
- Asset allocation determines the proportion of each asset class in the portfolio.
- Portfolio rebalancing periodically adjusts the portfolio to maintain target allocations.
- Performance measurement evaluates the portfolio's returns and risk.
Portfolio Management Strategies
- Active management involves actively selecting securities and timing market movements to beat the market.
- Passive management tracks a market index to match its performance.
- Hybrid management combines active and passive management approaches.
Risk Management Techniques
- Diversification spreads investments across asset classes and industries to reduce risk.
- Hedging uses derivatives to reduce exposure to specific risks.
- Asset allocation adjusts the portfolio's asset mix to manage risk.
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Description
This quiz covers the definition, primary and secondary functions of stock exchanges, as well as types of stock exchanges. Test your knowledge of stock exchanges and how they work!
