CIC Client Portfolio Management 2

Question 1

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?

Accepted Answer

Rebalance back to 70/30 to restore the target allocation

Answer

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

Question 2

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

Accepted Answer

Information ratio

Answer

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

Question 3

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

Accepted Answer

Interest income is generally exempt from federal income tax

Answer

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

Question 4

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

Accepted Answer

Broad market-cap-weighted index fund

Answer

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

Question 5

Which risk is NOT reduced through portfolio diversification?

Accepted Answer

Systematic (market) risk

Answer

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

(CIC) Certified Investment Counselor Practice Test