AIP Portfolio Management & Asset Allocation 2 — Questions and Answers
Question 1: An investor with a 30-year horizon wants to maximize long-term wealth. Which asset allocation strategy is most appropriate?
- 100% bonds for capital preservation
- Heavy equity tilt with gradual de-risking over time (Correct answer)
- Equal split between cash and equities
- 100% cash equivalents to avoid volatility
Correct 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.
Question 2: Which rebalancing trigger approach adjusts portfolio allocations only when asset weights deviate beyond a predetermined threshold?
- Calendar rebalancing
- Tactical rebalancing
- Threshold (band) rebalancing (Correct answer)
- Opportunistic rebalancing
Correct 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.
Question 3: What does the Sharpe ratio measure in portfolio evaluation?
- Total portfolio return relative to benchmark
- Excess return per unit of total risk (standard deviation) (Correct answer)
- Portfolio beta relative to the market
- Downside deviation relative to a minimum acceptable return
Correct 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.
Question 4: A portfolio manager shifts allocations away from long-term targets based on short-term market forecasts. This is best described as:
- Strategic asset allocation
- Tactical asset allocation (Correct answer)
- Liability-driven investing
- Core-satellite strategy
Correct answer: Tactical asset allocation
Tactical asset allocation involves short-term deviations from the strategic target to exploit perceived market mispricings or economic trends.
Question 5: Which risk measure captures only the downside portion of return volatility, making it preferred by some risk-averse investors?
- Standard deviation
- Beta
- Semi-deviation (downside deviation) (Correct answer)
- Tracking error
Correct 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.
Question 6: In a core-satellite portfolio, what is the primary purpose of the 'core' component?
- Generate alpha through active stock selection
- Provide broad market exposure at low cost (Correct answer)
- Hedge tail risk using derivatives
- Concentrate in high-conviction emerging opportunities
Correct 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.
Question 7: 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?
- Alpha alone
- Information ratio (Correct answer)
- Sortino ratio
- Treynor ratio
Correct 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.
AIP Portfolio Management & Asset Allocation 2
An investor with a 30-year horizon wants to maximize long-term wealth.
Which asset allocation strategy is most appropriate?