NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesHard
A portfolio manager is employing a strategy that involves frequently buying and selling securities to exploit short-term mispricings in the market. The manager uses complex quantitative models to identify these opportunities. Which portfolio management style best describes this approach?
- AMarket timing
- BFactor investing
- CStrategic asset allocation
- DPassive management
Show answer & explanationAnswer & explanation
Correct answer: A. Market timing
Market timing is a portfolio management strategy that attempts to predict future market direction and make investment decisions (buying or selling) based on these predictions, often involving frequent trading to exploit perceived short-term mispricings. This contrasts with passive strategies or long-term allocation models.
Why the other options are wrong
- B. Factor investing focuses on systematic biases (factors) in returns, but doesn't necessarily involve frequent trading based on short-term market predictions; it's a specific active strategy, but market timing is a more direct fit for 'frequently buying and selling to exploit short-term mispricings'.
- C. Strategic asset allocation sets long-term target allocations and rebalances periodically, not involving frequent short-term trading based on market predictions.
- D. Passive management involves tracking an index with minimal trading, directly opposite to the described strategy.
Market Timing
An active investment strategy that involves predicting future market price movements and making investment decisions (buying or selling) in an attempt to capitalize on these predictions.
- Often involves frequent trading.
- Difficult to execute successfully consistently.
- Contrasts with 'buy and hold' strategies.
- Can incur higher transaction costs.
Memory trick: Styles: Set course (passive), adjust sails (active), or predict the weather (timing).