CIC Portfolio Management & Asset Allocation 3 — Questions and Answers
Question 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:
- Momentum investing
- Tactical rebalancing
- Strategic rebalancing (Correct answer)
- Buy-and-hold drift
Correct answer: Strategic rebalancing
Restoring the portfolio to its original 60/40 strategic target after drift is strategic rebalancing, maintaining the long-term policy mix.
Question 2: Which risk measure considers ONLY returns below the mean or a minimum acceptable return?
- Standard deviation
- Beta
- Semivariance (Correct answer)
- Coefficient of variation
Correct answer: Semivariance
Semivariance (or semi-deviation) measures dispersion of returns only on the downside, below a target or the mean.
Question 3: The Capital Market Line (CML) differs from the Security Market Line (SML) in that the CML:
- Uses beta on the x-axis instead of standard deviation
- Applies only to efficiently diversified portfolios, not individual securities (Correct answer)
- Represents the minimum-variance frontier
- Measures unsystematic risk only
Correct answer: Applies only to efficiently diversified portfolios, not individual securities
The CML applies to efficient (fully diversified) portfolios using total risk (σ), while the SML applies to all assets and uses beta (systematic risk).
Question 4: An investor wants to minimize tracking error relative to the S&P 500 while slightly overweighting technology. This best describes:
- Passive indexing
- Enhanced indexing (Correct answer)
- Pure active management
- Tactical overlay
Correct answer: Enhanced indexing
Enhanced indexing attempts to closely replicate an index while making limited active bets to add modest alpha with minimal tracking error.
Question 5: Which of the following is a characteristic of alternative investments that makes them attractive for portfolio diversification?
- High liquidity and transparent pricing
- Low or negative correlation with traditional asset classes (Correct answer)
- Guaranteed minimum returns
- Full exemption from SEC regulation
Correct 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.
Question 6: A client's Investment Policy Statement specifies a maximum equity allocation of 75%. This constraint is BEST classified as a(n):
- Return objective
- Liquidity requirement
- Unique circumstance / constraint (Correct answer)
- Time horizon constraint
Correct 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.
Question 7: Mean-variance optimization (MVO) is criticized for producing highly concentrated portfolios because it:
- Ignores the risk-free rate when constructing the efficient frontier
- Is overly sensitive to small changes in expected return inputs (Correct answer)
- Cannot handle more than three asset classes simultaneously
- Requires the use of historical correlations only
Correct 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.
CIC Portfolio Management & Asset Allocation 3
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: