What is typically the goal of employing a momentum strategy?

• A. To eliminate all investment risks
• B. To ensure consistent returns over time
• C. To generate superior risk-adjusted performance through trend following
• D. To diversify holdings across all sectors

Answer: (C)

Employing a momentum strategy is primarily aimed at generating superior risk-adjusted performance through trend following. This investment approach relies on the premise that securities that have performed well in the past will continue to do so in the near future, and vice versa for those that have underperformed. Traders and investors who utilize momentum strategies look to capitalize on the persistence of price movements, buying assets that are trending upwards and selling those that are trending downwards.

This strategy can lead to increased returns as it takes advantage of existing market trends before they reverse, thus creating opportunities for higher returns relative to the risks taken in relation to the investment. By focusing on stocks or assets that show strong momentum, the aim is to enhance overall portfolio performance while carefully managing the associated risks.

The other options highlight goals that are not aligned with the core philosophy of momentum investing. For instance, eliminating all investment risks is impossible in practice; ensuring consistent returns over time is more characteristic of strategies focused on income or stability rather than momentum; and diversifying holdings across all sectors does not directly relate to the intent of capturing price trends and can sometimes dilute the potential benefits gained from a focused momentum approach.