CIC Client Portfolio Management 4 — Questions and Answers
Question 1: A client's portfolio has a beta of 1.4. How would this portfolio be expected to perform if the market rises 10%?
- Rise approximately 7.1%
- Rise approximately 10%
- Rise approximately 14% (Correct answer)
- Remain unchanged due to diversification
Correct answer: Rise approximately 14%
A beta of 1.4 means the portfolio is expected to move 1.4 times the market, so a 10% market gain implies approximately a 14% portfolio gain.
Question 2: Which asset class has historically provided the best long-term hedge against inflation?
- Short-term Treasury bills
- Fixed-rate bonds
- Equities and real assets (Correct answer)
- Money market funds
Correct answer: Equities and real assets
Equities and real assets (such as real estate and commodities) have historically outpaced inflation over long periods.
Question 3: A new client has conflicting financial goals: maximizing growth and avoiding any portfolio losses. How should a counselor address this?
- Accept both goals as stated and build an aggressive portfolio
- Explain that these goals are incompatible and help the client prioritize (Correct answer)
- Ignore the loss-aversion goal and focus only on growth
- Refer the client to another firm
Correct answer: Explain that these goals are incompatible and help the client prioritize
Higher growth potential requires accepting greater volatility and risk of loss; the counselor must help the client reconcile conflicting objectives.
Question 4: What is the main advantage of using a core-satellite portfolio construction approach?
- Eliminates all market risk
- Combines low-cost passive exposure with targeted active strategies (Correct answer)
- Guarantees outperformance versus the benchmark
- Requires no rebalancing
Correct answer: Combines low-cost passive exposure with targeted active strategies
The core-satellite approach uses a passive index core for broad market exposure while allocating a smaller satellite portion to active or alternative strategies.
Question 5: Which metric measures the percentage of a portfolio's return explained by movements in the benchmark index?
- Alpha
- R-squared (Correct answer)
- Standard deviation
- Tracking error
Correct answer: R-squared
R-squared indicates what percentage of a portfolio's performance variance is explained by the benchmark, ranging from 0 to 100.
Question 6: A client is 5 years from retirement and asks whether to reduce equity exposure. Which principle should guide the recommendation?
- Keep 100% equities for maximum growth
- Reduce risk as the time horizon shortens to protect accumulated wealth (Correct answer)
- Shift entirely to cash upon retirement announcement
- Increase speculative positions to accelerate goal achievement
Correct answer: Reduce risk as the time horizon shortens to protect accumulated wealth
As time horizons shorten, reducing portfolio risk limits the impact of a market downturn on retirement readiness.
Question 7: Which of the following best describes the purpose of an Investment Policy Statement (IPS)?
- A legal contract guaranteeing minimum investment returns
- A document outlining investment objectives, constraints, and guidelines for managing a portfolio (Correct answer)
- A tax form filed annually with the IRS
- A marketing brochure for prospective clients
Correct answer: A document outlining investment objectives, constraints, and guidelines for managing a portfolio
The IPS is a foundational document that formalizes the client's goals, risk tolerance, constraints, and the framework for portfolio decision-making.
CIC Client Portfolio Management 4
A client's portfolio has a beta of 1.4.
How would this portfolio be expected to perform if the market rises 10%?