Asset Management Investment Portfolio Asset Allocation 1 — Questions and Answers
Question 1: Modern Portfolio Theory (MPT), developed by Harry Markowitz, suggests investors should focus on:
- Selecting only the highest-return individual assets
- Portfolio-level risk-return tradeoff through diversification (Correct answer)
- Timing the market to maximize gains
- Holding assets with identical risk profiles
Correct answer: Portfolio-level risk-return tradeoff through diversification
MPT demonstrates that combining assets with low correlations reduces portfolio risk without proportionally reducing expected return.
Question 2: What does 'asset allocation' refer to in investment portfolio management?
- Tax treatment of investment gains
- Distribution of investments across asset classes such as equities, bonds, and cash (Correct answer)
- Selection of individual securities within a class
- Rebalancing frequency schedule
Correct answer: Distribution of investments across asset classes such as equities, bonds, and cash
Asset allocation is the strategic decision about how to divide a portfolio among different asset classes to meet risk and return objectives.
Question 3: Which asset allocation strategy maintains a fixed percentage in each asset class and periodically buys/sells to restore those targets?
- Buy-and-Hold Strategy
- Tactical Asset Allocation
- Strategic Asset Allocation with Rebalancing (Correct answer)
- Dynamic Hedging
Correct answer: Strategic Asset Allocation with Rebalancing
Strategic asset allocation sets long-term target weights and rebalancing restores those weights after market movements cause drift.
Question 4: The 'efficient frontier' in portfolio theory represents:
- Maximum leverage allowed by regulators
- Set of portfolios offering highest expected return for each level of risk (Correct answer)
- Minimum investment required for institutional access
- Border between taxable and tax-exempt assets
Correct answer: Set of portfolios offering highest expected return for each level of risk
The efficient frontier is the curve of optimal portfolios that maximize return for a given risk level or minimize risk for a given return.
Question 5: Which measure quantifies the systematic risk of an investment relative to the overall market?
- Alpha
- Beta (Correct answer)
- Standard Deviation
- Sharpe Ratio
Correct answer: Beta
Beta measures an asset's sensitivity to market movements; a beta of 1.5 means the asset moves 50% more than the market.
Question 6: In a US-regulated investment portfolio, which fiduciary standard requires advisors to act in the client's best interest?
- Suitability Standard
- Fiduciary Duty Standard (Correct answer)
- Prudent Vendor Rule
- Safe Harbor Provision
Correct answer: Fiduciary Duty Standard
The fiduciary duty standard requires investment advisors to prioritize client interests above their own, including full disclosure of conflicts.
Asset Management Investment Portfolio Asset Allocation 1
Modern Portfolio Theory (MPT), developed by Harry Markowitz, suggests investors should focus on: