Client Portfolio Management Flashcards

A client with a 70/30 equity/bond allocation experiences a market rally that shifts it to 80/20. What action should the counselor take?

Answer: Rebalance back to 70/30 to restore the target allocation

Rebalancing restores the portfolio to the client's target risk profile after drift caused by market movements.

Which measure best evaluates a portfolio manager's risk-adjusted performance relative to a benchmark?

Answer: Information ratio

The information ratio measures excess return over a benchmark per unit of tracking error, evaluating active management skill.

A client asks about the tax benefit of placing municipal bonds in a taxable account. What is the primary advantage?

Answer: Interest income is generally exempt from federal income tax

Municipal bond interest is typically exempt from federal income tax, making them attractive in taxable accounts for high-bracket investors.

An investor wants maximum diversification across U.S. stocks. Which portfolio construction approach is most efficient?

Answer: Broad market-cap-weighted index fund

A broad market-cap-weighted index fund provides exposure to thousands of stocks, minimizing unsystematic risk most efficiently.

Which risk is NOT reduced through portfolio diversification?

Answer: Systematic (market) risk

Systematic risk affects the entire market and cannot be eliminated through diversification, unlike unsystematic risks.

A retired client needs monthly income. Which portfolio strategy best addresses this need?

Answer: Systematic withdrawal plan from a balanced portfolio

A systematic withdrawal plan from a balanced portfolio provides regular income while maintaining growth potential and managing longevity risk.

What does a negative Sharpe ratio indicate about a portfolio?

Answer: The portfolio underperformed the risk-free rate on a risk-adjusted basis

A negative Sharpe ratio means the portfolio's excess return over the risk-free rate was negative, indicating poor risk-adjusted performance.