Risk Assessment & Asset Allocation Flashcards
7 cards from real CFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Assessment & Asset Allocation flashcards as text
Tail risk hedging strategies are typically implemented using:
Answer: Out-of-the-money put options on broad market indices
Out-of-the-money put options provide payoffs during large market downturns, making them a cost-effective tool for hedging against tail risk events.
Factor-based asset allocation (smart beta) differs from traditional cap-weighted indexing by:
Answer: Systematically overweighting stocks with targeted risk/return characteristics
Smart beta strategies tilt portfolios toward factors such as value, momentum, quality, or low volatility, seeking to capture systematic risk premia beyond market beta.
A portfolio manager wants to reduce duration risk without selling bonds. The most efficient instrument to achieve this is:
Answer: Interest rate swaps (pay fixed, receive floating)
An interest rate swap where the manager pays fixed and receives floating converts fixed-rate bond exposure to floating-rate, effectively reducing interest rate duration.
Which of the following is an example of systematic (market) risk that cannot be diversified away?
Answer: A Federal Reserve rate hike affects all bond prices
Systematic risk affects all market participants simultaneously; a Federal Reserve rate hike impacts all bonds and equities, and no amount of diversification eliminates this exposure.
The risk budgeting approach to asset allocation assigns capital based on:
Answer: The contribution of each asset to total portfolio risk
Risk budgeting allocates portfolio weights so that each asset class contributes a pre-specified share of total portfolio risk, rather than allocating equal capital.
When a fund manager uses Monte Carlo simulation for risk assessment, the primary advantage over historical simulation is that it:
Answer: Can generate scenarios not observed in history, including extreme tail events
Monte Carlo simulation generates thousands of hypothetical return paths using assumed distributions, capturing scenarios beyond what has been observed historically.
Rebalancing frequency in a strategic asset allocation policy primarily involves a trade-off between:
Answer: Risk control precision and transaction costs
More frequent rebalancing keeps the portfolio closer to its target risk profile but incurs higher transaction costs; less frequent rebalancing reduces costs but allows drift from intended risk.