AAMS Asset Allocation & Selection 5 — Questions and Answers
Question 1: Which Monte Carlo simulation output is most useful when evaluating retirement portfolio sustainability?
- Average projected portfolio value
- Probability of not depleting assets over the plan horizon (Correct answer)
- Maximum projected portfolio value
- Standard deviation of simulated returns
Correct answer: Probability of not depleting assets over the plan horizon
The probability of portfolio survival (not running out of money) across thousands of simulations directly measures retirement plan success.
Question 2: Which asset class characteristic makes Treasury Inflation-Protected Securities (TIPS) valuable in an asset allocation?
- High nominal yield relative to corporate bonds
- Principal that adjusts with the Consumer Price Index (Correct answer)
- Zero correlation with equity markets
- Tax-exempt interest at the federal level
Correct answer: Principal that adjusts with the Consumer Price Index
TIPS principal rises with inflation as measured by CPI, providing a direct hedge against purchasing power erosion.
Question 3: An advisor constructs a 'glide path' for a target-date fund. What does the glide path describe?
- The fund's fee reduction schedule over time
- The gradual shift from equities to bonds as the target date approaches (Correct answer)
- The rebalancing frequency increasing near retirement
- The geographical diversification strategy over time
Correct answer: The gradual shift from equities to bonds as the target date approaches
A glide path defines how a target-date fund's asset allocation automatically becomes more conservative as the retirement date nears.
Question 4: Which condition describes 'asset-liability mismatch' in portfolio management?
- Portfolio return exceeding the benchmark
- Assets with different risk profiles than planned liabilities (Correct answer)
- Over-diversification reducing returns
- Holding too much cash relative to equity
Correct answer: Assets with different risk profiles than planned liabilities
Asset-liability mismatch occurs when portfolio assets and future obligations have different interest rate sensitivities, durations, or timing.
Question 5: Which investment selection metric measures excess return earned per unit of total risk?
- Treynor ratio
- Sharpe ratio (Correct answer)
- Jensen's alpha
- Information ratio
Correct answer: Sharpe ratio
The Sharpe ratio divides excess return over the risk-free rate by the portfolio's standard deviation (total risk).
Question 6: A client is concerned about short-term market volatility but needs long-term growth. Which strategy best balances these competing needs?
- 100% allocation to short-term CDs
- A bucketing strategy separating near-term cash needs from growth assets (Correct answer)
- Market timing to exit before downturns
- Concentrating in dividend stocks only
Correct answer: A bucketing strategy separating near-term cash needs from growth assets
Bucketing separates liquid short-term funds from long-term growth assets, allowing equity exposure without needing to liquidate during downturns.
Question 7: In asset selection, which quantitative screen would best identify stocks with strong earnings quality?
- High price-to-sales ratio
- High cash flow relative to reported earnings (Correct answer)
- High short interest ratio
- Low book value per share
Correct answer: High cash flow relative to reported earnings
A high ratio of operating cash flow to reported earnings signals that earnings are backed by real cash, indicating strong earnings quality.
AAMS Asset Allocation & Selection 5
Which Monte Carlo simulation output is most useful when evaluating retirement portfolio sustainability?