IFIC Chapter 8 Key Terms questions with
complete solutions
active portfolio management - correct answer ✔✔An investment management style employed by
managers who believe that financial markets present occasional inefficiencies which can be exploited to
earn excess returns. Proponents of this approach will try to add value through strategies such as market
timing and individual security selection.
alpha - correct answer ✔✔A statistical measure of the value a fund manager adds to the performance of
the fund managed. If alpha is positive, the manager has added value to the portfolio. If the alpha is
negative, the manager has underperformed the market.
arithmetic mean - correct answer ✔✔A somewhat inaccurate method of calculating average annual
return. It involves adding up the annual returns and dividing by the number of years.
asset allocation - correct answer ✔✔The weight of the various components (cash, debt, equity, and
money market securities) of an investor's portfolio.
average - correct answer ✔✔A statistical tool used to measure the direction of the market. The most
common average is the Dow Jones Industrial Average.
beta - correct answer ✔✔The standard measure of market risk. It shows how much a security or a
portfolio fluctuates when the market as a whole fluctuates.
correlation - correct answer ✔✔A statistical measure of the degree to which the returns on a security
are associated with the returns on another security.
diversification - correct answer ✔✔The process of reducing investment risk by investing in different
types of securities issued by companies active in different industries. Ideally, these securities will not all
have the same response to economic and other events — as some decrease, others will hopefully
increase.
, dividend tax credit (DTC) - correct answer ✔✔Refers to the preferential tax treatment granted to
dividend income (common and preferred) received from taxable Canadian corporations. The dividend is
grossed up by 38% and the tax credit of 15.02% is calculated based on this amount.
duration - correct answer ✔✔A measure of a bond or a bond portfolio's sensitivity to changes in interest
rates. The higher (lower) the duration, the greater (smaller) the change in the value of a bond in
response to a given change in interest rates.
efficient - correct answer ✔✔If markets are efficient, the prices of securities reflect all the information
that exists about them.
fundamental analysis - correct answer ✔✔Security analysis that attempts to determine the true or
intrinsic value of a security by examining the fundamentals such as sales, earnings, economic changes,
competitive forces, and management.
geometric mean - correct answer ✔✔A calculation that determines the average compound return over
several time periods.
holding period return - correct answer ✔✔A transactional rate of return measure that takes into account
all cash flows and increases or decreases in a security's value for any time frame. Time frames can be
greater or less than a year.
inflation - correct answer ✔✔A generalized, sustained trend of rising prices.
insider trading - correct answer ✔✔The act of trading in securities based on undisclosed material non-
public information.
investment portfolio - correct answer ✔✔The fundamental characteristic is that it is a diversified
collection of securities. Those securities may include stocks, bonds, money market securities, and even
derivatives.
market risk - correct answer ✔✔Refers to the risk of fluctuations in the market as a whole — if the stock
market is in a slump, this will influence a fund that invests in stocks. Even a highly diversified mutual fund
has market risk.
complete solutions
active portfolio management - correct answer ✔✔An investment management style employed by
managers who believe that financial markets present occasional inefficiencies which can be exploited to
earn excess returns. Proponents of this approach will try to add value through strategies such as market
timing and individual security selection.
alpha - correct answer ✔✔A statistical measure of the value a fund manager adds to the performance of
the fund managed. If alpha is positive, the manager has added value to the portfolio. If the alpha is
negative, the manager has underperformed the market.
arithmetic mean - correct answer ✔✔A somewhat inaccurate method of calculating average annual
return. It involves adding up the annual returns and dividing by the number of years.
asset allocation - correct answer ✔✔The weight of the various components (cash, debt, equity, and
money market securities) of an investor's portfolio.
average - correct answer ✔✔A statistical tool used to measure the direction of the market. The most
common average is the Dow Jones Industrial Average.
beta - correct answer ✔✔The standard measure of market risk. It shows how much a security or a
portfolio fluctuates when the market as a whole fluctuates.
correlation - correct answer ✔✔A statistical measure of the degree to which the returns on a security
are associated with the returns on another security.
diversification - correct answer ✔✔The process of reducing investment risk by investing in different
types of securities issued by companies active in different industries. Ideally, these securities will not all
have the same response to economic and other events — as some decrease, others will hopefully
increase.
, dividend tax credit (DTC) - correct answer ✔✔Refers to the preferential tax treatment granted to
dividend income (common and preferred) received from taxable Canadian corporations. The dividend is
grossed up by 38% and the tax credit of 15.02% is calculated based on this amount.
duration - correct answer ✔✔A measure of a bond or a bond portfolio's sensitivity to changes in interest
rates. The higher (lower) the duration, the greater (smaller) the change in the value of a bond in
response to a given change in interest rates.
efficient - correct answer ✔✔If markets are efficient, the prices of securities reflect all the information
that exists about them.
fundamental analysis - correct answer ✔✔Security analysis that attempts to determine the true or
intrinsic value of a security by examining the fundamentals such as sales, earnings, economic changes,
competitive forces, and management.
geometric mean - correct answer ✔✔A calculation that determines the average compound return over
several time periods.
holding period return - correct answer ✔✔A transactional rate of return measure that takes into account
all cash flows and increases or decreases in a security's value for any time frame. Time frames can be
greater or less than a year.
inflation - correct answer ✔✔A generalized, sustained trend of rising prices.
insider trading - correct answer ✔✔The act of trading in securities based on undisclosed material non-
public information.
investment portfolio - correct answer ✔✔The fundamental characteristic is that it is a diversified
collection of securities. Those securities may include stocks, bonds, money market securities, and even
derivatives.
market risk - correct answer ✔✔Refers to the risk of fluctuations in the market as a whole — if the stock
market is in a slump, this will influence a fund that invests in stocks. Even a highly diversified mutual fund
has market risk.
