AAMS Asset Management Process 3 — Questions and Answers
Question 1: A manager shifts portfolio weights away from the strategic allocation to exploit a short-term market opportunity. This is best described as:
- Tactical asset allocation (Correct answer)
- Policy asset allocation
- Passive indexing
- Liability-driven investing
Correct answer: Tactical asset allocation
Tactical asset allocation involves temporary deviations from the strategic mix to capitalize on market conditions.
Question 2: Which of the following is NOT typically included in an Investment Policy Statement?
- Return objectives
- Risk tolerance
- Names of specific securities to hold (Correct answer)
- Time horizon
Correct answer: Names of specific securities to hold
An IPS establishes guidelines and objectives but does not name specific securities, which are selected during implementation.
Question 3: A client's portfolio underperforms its benchmark by 2%. The manager should first:
- Immediately replace all holdings
- Analyze the sources of the performance gap (Correct answer)
- Suspend rebalancing activities
- Increase risk to make up the shortfall
Correct answer: Analyze the sources of the performance gap
Performance attribution analysis identifies whether underperformance is due to asset allocation, security selection, or market conditions.
Question 4: The process of gathering financial data, identifying goals, and understanding a client's current situation occurs during which phase?
- Monitoring
- Portfolio construction
- Data collection and goal setting (Correct answer)
- Performance reporting
Correct answer: Data collection and goal setting
Data collection and goal setting is the foundational phase where the manager learns about the client's financial situation and objectives.
Question 5: A pension fund's asset allocation is driven primarily by its future benefit payment obligations. This approach is called:
- Growth investing
- Liability-driven investing (LDI) (Correct answer)
- Core-satellite strategy
- Factor-based allocation
Correct answer: Liability-driven investing (LDI)
Liability-driven investing structures the portfolio to match assets against future liabilities, commonly used by pension funds.
Question 6: Which of the following best describes 'monitoring' in the asset management process?
- Building the initial portfolio
- Ongoing review of the portfolio, client circumstances, and market conditions (Correct answer)
- Determining the initial asset allocation
- Filing regulatory compliance reports
Correct answer: Ongoing review of the portfolio, client circumstances, and market conditions
Monitoring is a continuous process of reviewing whether the portfolio still aligns with the client's objectives and constraints.
Question 7: A client receives a large inheritance and tells her advisor. In the asset management process, this information triggers:
- A benchmark change
- A review and potential update of the IPS (Correct answer)
- An automatic rebalancing trade
- A regulatory filing
Correct answer: A review and potential update of the IPS
A material change in client circumstances should prompt a review and possible revision of the IPS to reflect the new financial situation.
AAMS Asset Management Process 3
A manager shifts portfolio weights away from the strategic allocation to exploit a short-term market opportunity.
This is best described as: