AIP Portfolio Management & Asset Allocation 4

Question 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:

Accepted Answer

Portfolio rebalancing

Answer

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

Question 2

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

Accepted Answer

Efficient market hypothesis (EMH)

Answer

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

Question 3

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

Accepted Answer

Interest rate (price) risk

Answer

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.

Question 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?

Accepted Answer

Disposition effect

Answer

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

Question 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)?

Accepted Answer

13%

Answer

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

(AIP) Accredited Investment Professional Certification Practice Test

(AIP) Accredited Investment Professional Certification Practice Test

AIP Portfolio Management & Asset Allocation 4