CIC Portfolio Management & Asset Allocation 4

Question 1

A pension fund must pay $50 million in liabilities in 10 years. Which strategy BEST ensures assets will meet this obligation regardless of interest rate movements?

Accepted Answer

Cash-flow matching (dedication)

Answer

Cash-flow matching (dedication) purchases bonds whose coupon and principal payments exactly match the liability schedule, eliminating interest rate risk for known obligations.

Question 2

What is the primary purpose of a policy asset allocation (strategic asset allocation) in an IPS?

Accepted Answer

To establish long-term target weights reflecting the client's risk/return objectives

Answer

Strategic (policy) asset allocation sets long-term target weights for asset classes based on the client's goals, risk tolerance, and time horizon.

Question 3

Which measure adjusts portfolio return for market risk (beta) rather than total risk, making it useful for comparing non-diversified portfolios or individual securities?

Accepted Answer

Treynor ratio

Answer

The Treynor ratio divides excess return by beta (systematic risk), making it appropriate for evaluating components within a larger diversified portfolio.

Question 4

An investor increases gold and TIPS allocations prior to expected inflation spikes. This is an example of:

Accepted Answer

Tactical asset allocation using inflation hedges

Answer

Overweighting inflation-sensitive assets in anticipation of rising inflation is a tactical deviation from the strategic benchmark to hedge a specific macro risk.

Question 5

The Sortino ratio improves on the Sharpe ratio for asymmetric return distributions by:

Accepted Answer

Using only downside deviation (below a minimum acceptable return) in the denominator

Answer

The Sortino ratio penalizes only downside volatility (below the MAR), making it more appropriate when the return distribution is skewed.

(CIC) Certified Investment Counselor Practice Test

(CIC) Certified Investment Counselor Practice Test

CIC Portfolio Management & Asset Allocation 4