Asset Management Investment Portfolio Asset Allocation 2 — Questions and Answers
Question 1: Which asset class historically provides inflation protection and has low correlation with stocks and bonds?
- Money Market Funds
- Real Assets (commodities, real estate, infrastructure) (Correct answer)
- Investment-Grade Corporate Bonds
- Large-Cap Growth Equities
Correct answer: Real Assets (commodities, real estate, infrastructure)
Real assets tend to retain value during inflationary periods because their prices often rise with general price levels.
Question 2: What does the Sharpe Ratio measure in portfolio performance evaluation?
- Absolute return over benchmark
- Risk-adjusted return per unit of total risk (standard deviation) (Correct answer)
- Maximum drawdown experienced
- Dividend yield relative to price
Correct answer: Risk-adjusted return per unit of total risk (standard deviation)
The Sharpe Ratio divides excess return over the risk-free rate by portfolio standard deviation, measuring return earned per unit of risk.
Question 3: Dollar-Cost Averaging (DCA) as an asset allocation technique involves:
- Investing a lump sum at market lows
- Investing fixed dollar amounts at regular intervals regardless of price (Correct answer)
- Rebalancing only when allocation drifts over 10%
- Concentrating in highest-yield assets monthly
Correct answer: Investing fixed dollar amounts at regular intervals regardless of price
DCA reduces the impact of market volatility by purchasing more shares when prices are low and fewer when prices are high.
Question 4: Which US retirement account type allows tax-free growth and tax-free qualified withdrawals in retirement?
- Traditional IRA
- Roth IRA (Correct answer)
- SEP-IRA
- 403(b) Plan
Correct answer: Roth IRA
Roth IRA contributions are made with after-tax dollars, but qualified withdrawals in retirement are completely tax-free.
Question 5: In portfolio management, 'rebalancing drift' occurs when:
- An advisor changes investment strategy
- Market performance causes actual allocation to diverge from target weights (Correct answer)
- Transaction costs erode returns
- Benchmark index composition changes
Correct answer: Market performance causes actual allocation to diverge from target weights
Rebalancing drift refers to the natural deviation of portfolio weights from targets as different assets generate different returns over time.
Question 6: What is the primary function of alternative investments (hedge funds, private equity) in an institutional asset allocation?
- Guarantee capital preservation
- Enhance diversification and potentially improve risk-adjusted returns (Correct answer)
- Provide daily liquidity for operations
- Simplify regulatory reporting
Correct answer: Enhance diversification and potentially improve risk-adjusted returns
Alternatives often have low correlation with traditional assets, potentially improving portfolio diversification and risk-adjusted performance.
Asset Management Investment Portfolio Asset Allocation 2
Which asset class historically provides inflation protection and has low correlation with stocks and bonds?