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Portfolio Management & Asset Allocation Flashcards

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  1. A portfolio manager uses a 60/40 stock/bond mix. After equities rally strongly, the portfolio is now 70/30. Selling equities to restore 60/40 is called:

    Answer: Strategic rebalancing

    Restoring the portfolio to its original 60/40 strategic target after drift is strategic rebalancing, maintaining the long-term policy mix.

  2. Which risk measure considers ONLY returns below the mean or a minimum acceptable return?

    Answer: Semivariance

    Semivariance (or semi-deviation) measures dispersion of returns only on the downside, below a target or the mean.

  3. The Capital Market Line (CML) differs from the Security Market Line (SML) in that the CML:

    Answer: Applies only to efficiently diversified portfolios, not individual securities

    The CML applies to efficient (fully diversified) portfolios using total risk (ฯƒ), while the SML applies to all assets and uses beta (systematic risk).

  4. An investor wants to minimize tracking error relative to the S&P 500 while slightly overweighting technology. This best describes:

    Answer: Enhanced indexing

    Enhanced indexing attempts to closely replicate an index while making limited active bets to add modest alpha with minimal tracking error.

  5. Which of the following is a characteristic of alternative investments that makes them attractive for portfolio diversification?

    Answer: Low or negative correlation with traditional asset classes

    Alternatives such as hedge funds, private equity, and real assets often exhibit low correlation with stocks and bonds, improving portfolio diversification.

  6. A client's Investment Policy Statement specifies a maximum equity allocation of 75%. This constraint is BEST classified as a(n):

    Answer: Unique circumstance / constraint

    A maximum equity allocation ceiling imposed by client preference or policy is a portfolio constraint, typically documented under unique circumstances in the IPS.

  7. Mean-variance optimization (MVO) is criticized for producing highly concentrated portfolios because it:

    Answer: Is overly sensitive to small changes in expected return inputs

    MVO is input-sensitive; small estimation errors in expected returns lead to large, concentrated swings in optimal portfolio weights.

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Portfolio Management & Asset Allocation Flashcards โ€” CIC Study Cards with Answers