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
A pension fund must match future liabilities with asset cash flows. This approach is best described as:
Answer: Liability-driven investing (LDI)
Liability-driven investing structures the portfolio to hedge against changes in liability values, ensuring assets track or exceed future obligations.
Which of the following best explains why adding an asset with low correlation to a portfolio can reduce overall portfolio risk?
Answer: Diversification benefits arise when asset returns do not move in lockstep
Modern portfolio theory shows that combining assets with low or negative correlations reduces portfolio variance even if individual asset risks remain unchanged.
An investor's policy statement specifies a maximum portfolio drawdown of 15%. Which portfolio construction tool directly addresses this constraint?
Answer: Value at Risk (VaR) and drawdown-constrained optimization
Drawdown-constrained optimization and VaR-based frameworks explicitly limit worst-case losses, directly implementing the investor's stated risk tolerance.
Which factor in the Fama-French three-factor model explains the tendency of small-cap stocks to outperform large-cap stocks over time?
Answer: SMB (Small Minus Big)
The SMB factor captures the size premium, reflecting the historical tendency of small-capitalization stocks to generate higher returns than large-cap stocks.
A portfolio has an expected return of 10% and a standard deviation of 12%. The risk-free rate is 2%. What is its Sharpe ratio?
Answer: 0.67
Sharpe ratio = (10% - 2%) / 12% = 8% / 12% = 0.67, representing the excess return earned per unit of total risk.
In mean-variance optimization, what is the 'efficient frontier'?
Answer: The set of portfolios offering maximum return for each level of risk
The efficient frontier represents the upper boundary of the feasible set, containing portfolios with the highest expected return for each given level of standard deviation.
Which alternative investment class is most commonly used to provide inflation protection and low correlation to traditional equity and bond portfolios?
Answer: Real assets such as commodities and real estate
Real assets like commodities and real estate tend to appreciate with inflation and have low correlations to stocks and bonds, making them effective portfolio diversifiers.