Style

Lesson

Investment style refers to the approach or strategy an investment manager uses to select and manage a portfolio of securities.

Practice Question #1

Which investment style focuses on buying undervalued stocks with strong fundamentals?

A) Value Investing

B) Growth Investing

C) Momentum Investing

D) Contrarian Investing

Select an option above to see an explanation here.

A) Value Investing focuses on buying undervalued stocks with solid fundamentals. B) Growth Investing focuses on buying stocks with high growth potential. C) Momentum Investing focuses on buying stocks with strong price momentum. D) Contrarian Investing involves buying stocks that are currently out of favor.

Terms

Investment Style:: The approach or strategy an investment manager uses to select and manage a portfolio of securities.
Value Investing:: An investment style that focuses on buying undervalued stocks with solid fundamentals and holding them long-term.
Growth Investing:: An investment style that focuses on buying stocks with high growth potential, even if they are currently overvalued.
Momentum Investing:: An investment style that focuses on buying stocks with strong price momentum and selling those with weak momentum.
Contrarian Investing:: An investment style that involves buying stocks currently out of favor and selling popular ones.

Practice Question #2

What is the primary difference between passive and active investing?

A) The level of risk involved

B) The time horizon of the investments

C) The degree of active management in selecting and managing securities

D) The focus on diversification

Select an option above to see an explanation here.

A) The risk level involved can vary between passive and active investing. B) The time horizon of the investments can also vary within both passive and active investing. C) Passive investing involves tracking a market index or benchmark with minimal active management, while active investing involves actively selecting and managing individual securities. D) Both passive and active investing can involve diversification.

Historical Example

In the late 1990s, many investors followed a growth investing style, focusing on technology stocks with high growth potential. This led to the dot-com bubble, where stock prices became significantly overvalued. When the bubble burst in 2000, many growth investors suffered significant losses.

Practice Question #3

Which investment strategy involves shifting investments between different sectors based on economic and market conditions?

A) Sector Rotation

B) Diversification

C) Asset Allocation

D) Contrarian Investing

Select an option above to see an explanation here.

A) Sector Rotation involves shifting investments between sectors based on economic and market conditions. B) Diversification involves spreading investments across different asset classes, sectors, and geographic regions. C) Asset Allocation involves dividing an investment portfolio among different asset classes. D) Contrarian Investing involves buying stocks currently out of favor and selling popular ones.

Real-World Example

An investor who follows a value investing style might look for companies with low price-to-earnings ratios, strong balance sheets, and consistent dividend payments. They might invest in a company that has recently experienced a temporary setback, believing its fundamentals remain strong and its stock price will eventually recover.