CIC Portfolio Management & Asset Allocation 5

Question 1

In the context of behavioral finance, which bias causes investors to hold losing positions too long because they weigh losses more heavily than equivalent gains?

Accepted Answer

Loss aversion

Answer

Loss aversion, a core concept in prospect theory, explains why investors hold losers to avoid realizing losses, as losses feel approximately twice as painful as equivalent gains feel good.

Question 2

A portfolio's active return is defined as:

Accepted Answer

Portfolio return minus benchmark return

Answer

Active return (also called alpha in performance attribution) is the difference between portfolio return and its benchmark return.

Question 3

Which asset allocation approach explicitly accounts for a client's future financial obligations (e.g., pension payouts) when constructing the portfolio?

Accepted Answer

Liability-driven investing (LDI)

Answer

Liability-driven investing constructs the asset portfolio with the primary goal of funding known future liabilities, rather than maximizing return in isolation.

Question 4

Factor investing (smart beta) seeks to capture returns from which of the following?

Accepted Answer

Specific systematic risk factors such as value, size, and momentum

Answer

Factor investing (smart beta) systematically tilts toward documented risk premia such as value, size, momentum, quality, and low volatility.

Question 5

An investment counselor's client has a high marginal tax rate. Which portfolio management technique is MOST beneficial for this client?

Accepted Answer

Tax-loss harvesting to offset capital gains

Answer

Tax-loss harvesting realizes capital losses strategically to offset gains, reducing the tax drag on after-tax portfolio returns for high-bracket investors.

(CIC) Certified Investment Counselor Practice Test

(CIC) Certified Investment Counselor Practice Test

CIC Portfolio Management & Asset Allocation 5