Asset Allocation & Selection Flashcards

Which asset allocation approach adjusts portfolio weights back to target percentages after market movements?

Answer: Rebalancing

Rebalancing restores a portfolio to its target asset allocation after drift caused by differing asset class returns.

A client has a 10-year investment horizon and moderate risk tolerance. Which allocation would typically be MOST appropriate?

Answer: 60% equities / 40% bonds

A 60/40 equity-to-bond split is a classic moderate-risk allocation suitable for intermediate-to-long horizons.

Which risk measure captures only downside deviations from a target return?

Answer: Semi-variance

Semi-variance measures volatility only for returns that fall below a specified target, focusing on downside risk.

In the context of asset selection, which factor style focuses on stocks trading below their intrinsic value?

Answer: Value

Value investing targets stocks with low price-to-earnings or price-to-book ratios relative to fundamentals.

What is the primary purpose of using a liability-relative allocation strategy?

Answer: To match assets with specific future liabilities

Liability-relative (or liability-driven) investing structures assets so they can fund specific future obligations, reducing funding risk.

Which of the following best describes the 'core-satellite' portfolio construction strategy?

Answer: Holding a passive index core with active specialist satellite positions

Core-satellite combines a diversified passive core for market exposure with smaller active satellite positions seeking alpha.

When building a globally diversified portfolio, which risk cannot be eliminated through international diversification?

Answer: Systematic global market risk

Systematic global market risk affects all markets simultaneously and cannot be diversified away even with international holdings.