Canadian Securities Course (CSC) Level 2 Practice Exam

Which strategy aims to outperform a benchmark portfolio on a risk-adjusted basis?

1. Passive investment strategy

2. Active investment strategy

3. Value investing strategy

4. Buy and hold investment strategy

The correct answer is: Active investment strategy

The active investment strategy is designed to outperform a benchmark portfolio on a risk-adjusted basis. This approach involves actively selecting securities and making investment decisions based on various analyses and market conditions, rather than simply tracking an index or relying on a set asset allocation. Investors who employ an active investment strategy typically believe that they can identify undervalued assets or predict market movements better than the market as a whole. By doing so, they aim not only to achieve higher returns than the benchmark but also to manage the level of risk associated with those returns. This is accomplished through strategic buying and selling of assets in response to market conditions and individual stock performance. In contrast, a passive investment strategy focuses on matching the performance of a benchmark index rather than trying to beat it. Value investing primarily concentrates on identifying undervalued stocks that may provide good long-term returns, but it doesn’t necessarily imply an intention to outperform a benchmark on a risk-adjusted basis. The buy and hold strategy involves acquiring stocks and holding them for a long period without attempting to time the market, which does not inherently target outperforming a benchmark either. Thus, the active investment strategy aligns directly with the goal of exceeding benchmark performance while considering risk, making it the correct choice in this context.