AAMS Asset Management Process 5

Question 1

A client's portfolio drifts significantly from its target allocation. The manager must weigh the cost of rebalancing against which of the following?

Accepted Answer

Transaction costs and tax consequences

Answer

Rebalancing decisions must balance the benefit of restoring target allocation against transaction costs and potential tax liabilities from selling appreciated assets.

Question 2

Which of the following best describes the role of diversification in the asset management process?

Accepted Answer

Reducing unsystematic risk by spreading investments across uncorrelated assets

Answer

Diversification reduces unsystematic (company-specific) risk by combining assets whose returns are not perfectly correlated.

Question 3

A client nearing retirement shifts from 80% equities to 50% equities. This change most likely reflects a shift in:

Accepted Answer

Time horizon and risk tolerance

Answer

As clients near retirement, their shorter time horizon and lower risk tolerance typically prompt a shift toward more conservative allocations.

Question 4

Which of the following metrics measures the return earned per unit of total risk taken by a portfolio?

Accepted Answer

Sharpe ratio

Answer

The Sharpe ratio divides excess return (above the risk-free rate) by the portfolio's standard deviation to measure return per unit of total risk.

Question 5

A portfolio manager uses futures contracts to temporarily reduce equity exposure without selling holdings. This technique is known as:

Accepted Answer

Overlay management

Answer

Overlay management uses derivatives to adjust portfolio exposure efficiently without disturbing the underlying holdings.

(AAMS) Accredited Asset Management Specialist Practice Test

(AAMS) Accredited Asset Management Specialist Practice Test

AAMS Asset Management Process 5