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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.

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  1. A 60/40 equity/bond portfolio drifts to 70/30 after a strong equity rally. The manager sells equities and buys bonds to restore targets. This action is called:

    Answer: Portfolio rebalancing

    Rebalancing restores the portfolio to its strategic asset allocation targets after market movements cause drift from intended weights.

  2. Which portfolio management concept states that markets price securities efficiently, making consistent alpha generation through active management unlikely?

    Answer: Efficient market hypothesis (EMH)

    The EMH posits that asset prices reflect all available information, leaving little room for active managers to consistently outperform after fees.

  3. When constructing a fixed income portfolio, 'duration matching' is used to hedge against which primary risk?

    Answer: Interest rate (price) risk

    Duration matching aligns the portfolio's interest rate sensitivity with that of its liabilities, neutralizing the impact of parallel yield curve shifts on portfolio value.

  4. Which behavioral bias causes investors to hold losing positions too long and sell winning positions too early, contrary to optimal tax and return strategies?

    Answer: Disposition effect

    The disposition effect, rooted in prospect theory, leads investors to realize gains quickly (winners) while avoiding realizing losses (losers).

  5. A portfolio's beta is 1.3 relative to the S&P 500. If the market rises 10%, what is the expected portfolio return (assuming zero alpha)?

    Answer: 13%

    Expected return = beta × market return = 1.3 × 10% = 13%, as a beta above 1.0 amplifies market movements.

  6. In the context of global asset allocation, currency hedging of international equity exposure primarily eliminates which risk?

    Answer: Foreign exchange rate fluctuation risk

    Currency hedging using forward contracts or currency swaps removes the impact of exchange rate movements on international investment returns.

  7. Which asset allocation approach uses scenario analysis and stress testing to evaluate how a portfolio performs during market crises, rather than relying solely on historical correlations?

    Answer: Stress-test-based portfolio construction

    Stress-test-based approaches simulate extreme market scenarios (e.g., 2008 crisis, 1987 crash) to assess portfolio vulnerability beyond what normal-distribution models capture.