CIC Portfolio Management & Asset Allocation 2 — Questions and Answers
Question 1: An investor has a portfolio with a beta of 1.4. If the market declines by 10%, what is the expected portfolio decline according to the Capital Asset Pricing Model?
- 10%
- 14% (Correct answer)
- 4%
- 1.4%
Correct answer: 14%
Beta of 1.4 means the portfolio is expected to move 1.4 times the market, so a 10% market decline implies a 14% portfolio decline.
Question 2: Which rebalancing strategy triggers a portfolio adjustment only when asset weights drift beyond a predefined threshold?
- Calendar rebalancing
- Tactical rebalancing
- Threshold (corridor) rebalancing (Correct answer)
- Buy-and-hold rebalancing
Correct answer: Threshold (corridor) rebalancing
Threshold or corridor rebalancing triggers rebalancing only when an asset class drifts outside a specified band around its target weight.
Question 3: A client receives a large inheritance. Using a core-satellite approach, the 'satellite' portion is BEST described as:
- A diversified index fund representing market beta
- Active or alternative investments seeking excess returns (Correct answer)
- The minimum-variance portion of the portfolio
- Treasury bonds held to maturity
Correct answer: Active or alternative investments seeking excess returns
In a core-satellite framework, the satellite consists of active or alternative strategies designed to generate alpha around a passive core.
Question 4: What does the Sharpe ratio measure?
- Total return relative to benchmark
- Excess return per unit of total risk (standard deviation) (Correct answer)
- Excess return per unit of systematic risk
- Return relative to downside deviation
Correct answer: Excess return per unit of total risk (standard deviation)
The Sharpe ratio is calculated as (portfolio return − risk-free rate) / standard deviation, measuring reward per unit of total risk.
Question 5: An investment counselor recommends increasing equity allocation during a bull market to capture gains. This is an example of:
- Strategic asset allocation
- Tactical asset allocation (Correct answer)
- Liability-driven investing
- Constant-mix rebalancing
Correct answer: Tactical asset allocation
Tactical asset allocation involves short-term deviations from the strategic target to exploit perceived market opportunities.
Question 6: Which of the following BEST describes the efficient frontier?
- The set of portfolios with the highest return for a given level of risk (Correct answer)
- The set of portfolios with zero correlation among assets
- The single portfolio with the maximum Sharpe ratio
- The minimum return required to meet a liability
Correct answer: The set of portfolios with the highest return for a given level of risk
The efficient frontier represents the set of optimal portfolios offering the maximum expected return for each level of portfolio risk.
Question 7: Duration matching in liability-driven investing primarily protects a portfolio against:
- Currency risk
- Credit default risk
- Interest rate risk (Correct answer)
- Liquidity risk
Correct answer: Interest rate risk
Duration matching aligns the interest rate sensitivity of assets with that of liabilities, neutralizing the impact of parallel yield curve shifts.
CIC Portfolio Management & Asset Allocation 2
An investor has a portfolio with a beta of 1.4.
If the market declines by 10%, what is the expected portfolio decline according to the Capital Asset Pricing Model?