Asset Management Process Flashcards

Which step in the asset management process involves identifying a client's tolerance for loss and time horizon?

Answer: Risk assessment

Risk assessment identifies a client's risk tolerance, time horizon, and capacity for loss before building a portfolio.

A portfolio manager reviews quarterly returns against a benchmark index. This activity is best described as:

Answer: Performance evaluation

Performance evaluation measures portfolio returns against a predetermined benchmark to assess investment effectiveness.

When a client's equity holdings grow from 60% to 68% due to market gains, the manager sells equities to return to 60%. This is called:

Answer: Rebalancing

Rebalancing restores a portfolio to its target asset allocation after market movements cause drift.

Which of the following best describes the purpose of an Investment Policy Statement (IPS)?

Answer: To document investment guidelines, objectives, and constraints

An IPS formalizes a client's investment objectives, risk tolerance, constraints, and guidelines to govern portfolio management.

In the asset management process, which constraint addresses a client's need to convert investments to cash quickly without significant loss?

Answer: Liquidity constraint

The liquidity constraint reflects a client's need to access funds readily, influencing how much is held in liquid assets.

A client has a 30-year retirement timeline. In the asset management process, this information primarily affects:

Answer: The strategic asset allocation

A long time horizon allows for greater equity exposure in strategic asset allocation because there is more time to recover from volatility.

Which asset management process step translates the IPS into actual portfolio holdings?

Answer: Implementation

Implementation involves executing trades to build the portfolio in accordance with the strategy outlined in the IPS.