CIFC Investment Strategies and Portfolio Management 2 — Questions and Answers
Question 1: Which portfolio rebalancing approach triggers trades only when an asset class drifts beyond a set percentage band from its target?
- Calendar rebalancing
- Threshold rebalancing (Correct answer)
- Tactical rebalancing
- Constant-mix rebalancing
Correct answer: Threshold rebalancing
Threshold (or tolerance-band) rebalancing triggers trades when an allocation drifts past a pre-set band, regardless of calendar date.
Question 2: A fund manager overweights technology stocks because she believes the sector will outperform over the next six months. This is an example of:
- Strategic asset allocation
- Tactical asset allocation (Correct answer)
- Passive indexing
- Dollar-cost averaging
Correct answer: Tactical asset allocation
Tactical asset allocation involves short-term deviations from the strategic mix to exploit perceived market opportunities.
Question 3: The Sharpe ratio measures excess return per unit of:
- Systematic risk
- Credit risk
- Total risk (standard deviation) (Correct answer)
- Duration risk
Correct answer: Total risk (standard deviation)
The Sharpe ratio divides a portfolio's excess return over the risk-free rate by its total standard deviation.
Question 4: An investor holds a bond fund and an equity fund that historically move in opposite directions. The primary benefit exploited is:
- Leverage
- Liquidity
- Negative correlation for diversification (Correct answer)
- Positive skewness
Correct answer: Negative correlation for diversification
Combining negatively correlated assets reduces portfolio volatility, which is the core diversification benefit.
Question 5: Core-satellite portfolio construction typically places index funds in the core because they:
- Guarantee above-market returns
- Provide low-cost broad market exposure (Correct answer)
- Eliminate currency risk
- Focus on alternative assets
Correct answer: Provide low-cost broad market exposure
Index funds offer diversified market exposure at low cost, making them ideal as the stable core of the portfolio.
Question 6: Which measure adjusts portfolio return for systematic risk rather than total risk?
- Sharpe ratio
- Standard deviation
- Treynor ratio (Correct answer)
- Alpha
Correct answer: Treynor ratio
The Treynor ratio divides excess return by beta, focusing solely on market (systematic) risk.
Question 7: An investor selling a losing position in December and repurchasing a similar fund in January to reset the cost base is engaging in:
- Wash-sale arbitrage
- Tax-loss harvesting (Correct answer)
- Return stacking
- Sector rotation
Correct answer: Tax-loss harvesting
Tax-loss harvesting involves crystallizing capital losses to offset gains, improving after-tax returns.
CIFC Investment Strategies and Portfolio Management 2
Which portfolio rebalancing approach triggers trades only when an asset class drifts beyond a set percentage band from its target?