CIC Client Portfolio Management 5 — Questions and Answers
Question 1: A client holds a large illiquid private equity position. Which portfolio risk does this primarily introduce?
- Currency risk
- Liquidity risk (Correct answer)
- Reinvestment risk
- Credit risk
Correct answer: Liquidity risk
Private equity is illiquid, meaning it cannot be quickly sold at fair value, creating liquidity risk if the client needs cash.
Question 2: When constructing a portfolio for a foundation with a perpetual time horizon, which factor is most critical?
- Preserving principal above all else in cash
- Generating real returns sufficient to meet spending policy and preserve purchasing power (Correct answer)
- Maximizing short-term income distributions
- Minimizing portfolio complexity
Correct answer: Generating real returns sufficient to meet spending policy and preserve purchasing power
A perpetual institution must generate real returns that cover its spending rate and offset inflation to sustain operations indefinitely.
Question 3: A portfolio's standard deviation increased from 10% to 18% after adding a new position. What does this indicate?
- The portfolio became less risky
- Overall portfolio volatility increased (Correct answer)
- The Sharpe ratio improved
- Systematic risk was eliminated
Correct answer: Overall portfolio volatility increased
An increase in standard deviation indicates higher total portfolio volatility, meaning greater dispersion of expected returns.
Question 4: Which strategy is most appropriate for a client who needs to fund a child's college tuition in exactly 8 years?
- Immunization using bonds matched to the liability date (Correct answer)
- 100% allocation to small-cap growth stocks
- Holding only money market instruments for safety
- Buying put options on the S&P 500
Correct answer: Immunization using bonds matched to the liability date
Immunization matches the bond portfolio's duration to the known future liability date, locking in the needed return regardless of rate movements.
Question 5: A counselor identifies that a client's portfolio has drifted due to market movements. What is the primary risk of NOT rebalancing?
- Transaction costs will be eliminated
- The portfolio will exceed the client's intended risk level (Correct answer)
- The portfolio will earn higher returns guaranteed
- Tax efficiency will automatically improve
Correct answer: The portfolio will exceed the client's intended risk level
Without rebalancing, asset drift causes the portfolio to take on more or less risk than the client's IPS intended, misaligning with their risk tolerance.
Question 6: Which of the following is an example of tactical asset allocation?
- Setting a long-term 60/40 equity/bond target and never deviating
- Temporarily overweighting equities based on a bullish short-term market outlook (Correct answer)
- Using only index funds in the portfolio
- Rebalancing annually back to the strategic target
Correct answer: Temporarily overweighting equities based on a bullish short-term market outlook
Tactical asset allocation involves short-term deviations from the strategic target to exploit perceived market opportunities.
Question 7: A client with moderate risk tolerance receives a large inheritance and wants to invest a lump sum. What is a key consideration before deploying the capital?
- Immediately invest 100% in the highest-returning asset class from last year
- Assess whether the inheritance changes the client's overall risk profile and financial plan (Correct answer)
- Place all funds in Treasury bills regardless of goals
- Delay investment indefinitely to avoid market risk
Correct answer: Assess whether the inheritance changes the client's overall risk profile and financial plan
A significant change in wealth may alter the client's risk capacity, tax situation, and goals, requiring a comprehensive review before investing.
CIC Client Portfolio Management 5
A client holds a large illiquid private equity position.
Which portfolio risk does this primarily introduce?