AAMS Asset Allocation & Selection 3

Question 1

Which concept describes the tendency of asset class returns to move together during market crises, reducing diversification benefits?

Accepted Answer

Contagion

Answer

Contagion refers to the spread of financial distress across markets, causing correlations to spike toward 1.0 during crises.

Question 2

A tactical asset allocation shift increasing equity exposure based on a perceived market undervaluation is best described as:

Accepted Answer

A short-term deviation from strategic allocation

Answer

Tactical asset allocation involves short-term, deliberate deviations from the strategic benchmark to exploit market inefficiencies.

Question 3

Which metric would an advisor use to evaluate whether additional portfolio diversification is still beneficial?

Accepted Answer

Marginal contribution to risk

Answer

Marginal contribution to risk measures how much each additional holding adds to total portfolio risk, indicating when diversification benefits diminish.

Question 4

In mean-variance optimization, which input has historically been the MOST difficult to estimate accurately?

Accepted Answer

Expected returns

Answer

Expected returns are notoriously difficult to forecast accurately, making them the most problematic input in mean-variance optimization.

Question 5

A 75-year-old retiree asks about increasing equity allocation for inflation protection. Which consideration should the advisor prioritize FIRST?

Accepted Answer

The client's remaining investment horizon and sequence-of-returns risk

Answer

Sequence-of-returns risk is critical for retirees, as early large losses can permanently impair a portfolio's ability to sustain withdrawals.

(AAMS) Accredited Asset Management Specialist Practice Test

(AAMS) Accredited Asset Management Specialist Practice Test

AAMS Asset Allocation & Selection 3