Portfolio Management & Asset Allocation Flashcards
7 cards from real AIP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Portfolio Management & Asset Allocation flashcards as text
An investor with a 30-year horizon wants to maximize long-term wealth. Which asset allocation strategy is most appropriate?
Answer: Heavy equity tilt with gradual de-risking over time
Long time horizons allow investors to tolerate short-term volatility in exchange for higher long-term equity returns, with gradual de-risking as retirement approaches.
Which rebalancing trigger approach adjusts portfolio allocations only when asset weights deviate beyond a predetermined threshold?
Answer: Threshold (band) rebalancing
Threshold or band rebalancing triggers trades only when an asset class drifts beyond a set percentage from its target, reducing unnecessary transaction costs.
What does the Sharpe ratio measure in portfolio evaluation?
Answer: Excess return per unit of total risk (standard deviation)
The Sharpe ratio divides a portfolio's excess return over the risk-free rate by its standard deviation, measuring risk-adjusted performance.
A portfolio manager shifts allocations away from long-term targets based on short-term market forecasts. This is best described as:
Answer: Tactical asset allocation
Tactical asset allocation involves short-term deviations from the strategic target to exploit perceived market mispricings or economic trends.
Which risk measure captures only the downside portion of return volatility, making it preferred by some risk-averse investors?
Answer: Semi-deviation (downside deviation)
Semi-deviation measures variability only for returns below a target or mean, focusing on the negative outcomes investors most wish to avoid.
In a core-satellite portfolio, what is the primary purpose of the 'core' component?
Answer: Provide broad market exposure at low cost
The core typically consists of low-cost index funds providing broad market exposure, while satellites pursue higher-return active strategies.
When comparing two portfolios with the same Sharpe ratio but different tracking errors versus a benchmark, which additional metric helps distinguish their active management quality?
Answer: Information ratio
The information ratio measures active return (alpha) per unit of active risk (tracking error), distinguishing how efficiently a manager generates excess return.