AAMS Investment Strategies 2 — Questions and Answers
Question 1: Which tactical asset allocation approach involves shifting weights toward asset classes that have recently underperformed relative to their historical averages?
- Momentum investing
- Contrarian rebalancing (Correct answer)
- Buy-and-hold indexing
- Sector rotation
Correct answer: Contrarian rebalancing
Contrarian rebalancing shifts weights toward underperforming asset classes, betting on mean reversion to historical averages.
Question 2: A client wants to reduce sequence-of-returns risk during the first decade of retirement. Which strategy best addresses this concern?
- Increasing equity allocation to 90%
- Implementing a bucket strategy with cash reserves for near-term needs (Correct answer)
- Concentrating in high-yield bonds
- Eliminating international diversification
Correct answer: Implementing a bucket strategy with cash reserves for near-term needs
A bucket strategy holds cash or short-term assets for near-term withdrawals, shielding the portfolio from selling equities at depressed prices.
Question 3: What is the primary objective of a liability-driven investing (LDI) strategy?
- Maximizing absolute portfolio return
- Matching asset cash flows to future liability obligations (Correct answer)
- Minimizing portfolio volatility at all costs
- Achieving benchmark outperformance every quarter
Correct answer: Matching asset cash flows to future liability obligations
LDI focuses on structuring assets so their cash flows match the timing and magnitude of the investor's future liabilities.
Question 4: A 130/30 strategy involves what combination of long and short positions?
- 130% long equities, 30% long bonds
- 130% long equities, 30% short equities (Correct answer)
- 100% long equities, 30% short bonds
- 130% short equities, 30% long cash
Correct answer: 130% long equities, 30% short equities
A 130/30 fund takes 130% long equity exposure and 30% short equity exposure, maintaining net 100% market exposure while adding alpha potential.
Question 5: Which of the following best describes a 'core-satellite' portfolio construction approach?
- Holding only index funds with no active management
- Pairing a passive core with actively managed satellite positions (Correct answer)
- Concentrating entirely in alternative investments
- Using only sector ETFs without broad market exposure
Correct answer: Pairing a passive core with actively managed satellite positions
Core-satellite combines a low-cost passive core (e.g., broad index funds) with smaller active or alternative satellite allocations seeking enhanced returns.
Question 6: In factor investing, the 'value' factor is typically captured by buying stocks with:
- High price-to-book ratios and strong momentum
- Low price-to-book or price-to-earnings ratios relative to peers (Correct answer)
- High earnings growth and expanding margins
- Large market capitalizations and stable dividends
Correct answer: Low price-to-book or price-to-earnings ratios relative to peers
The value factor targets stocks with low valuation multiples (e.g., P/B, P/E), which historically have delivered a premium over growth stocks.
Question 7: A systematic rebalancing policy that triggers trades only when allocations drift beyond a set band (e.g., ±5%) is called:
- Calendar rebalancing
- Threshold or tolerance-band rebalancing (Correct answer)
- Tactical rebalancing
- Dynamic hedging
Correct answer: Threshold or tolerance-band rebalancing
Threshold rebalancing triggers only when allocations breach a predefined drift band, reducing unnecessary turnover compared to calendar-based approaches.
AAMS Investment Strategies 2
Which tactical asset allocation approach involves shifting weights toward asset classes that have recently underperformed relative to their historical averages?