CIFC Investment Strategies and Portfolio Management 3 — Questions and Answers
Question 1: In a liability-driven investing (LDI) strategy, the primary benchmark for portfolio construction is:
- The S&P/TSX Composite Index
- A blended equity benchmark
- The present value of the investor's future liabilities (Correct answer)
- The Consumer Price Index
Correct answer: The present value of the investor's future liabilities
LDI aligns portfolio assets with the characteristics of future liabilities, making liabilities the effective benchmark.
Question 2: A portfolio with a beta greater than 1.0 is expected to:
- Outperform in falling markets
- Amplify market movements up and down (Correct answer)
- Have lower volatility than the market
- Generate alpha regardless of market direction
Correct answer: Amplify market movements up and down
A beta above 1.0 indicates the portfolio moves more than the market in both directions.
Question 3: Which asset allocation approach keeps a fixed proportion in each asset class by continuously selling winners and buying laggards?
- Buy-and-hold
- Constant-proportion portfolio insurance (CPPI)
- Constant-mix strategy (Correct answer)
- Tactical tilt
Correct answer: Constant-mix strategy
A constant-mix strategy maintains fixed weights by trimming outperformers and adding to underperformers, acting as a contrarian approach.
Question 4: Correlation coefficients range from -1 to +1. A coefficient of 0 between two assets means:
- They always move together
- They always move in opposite directions
- There is no linear relationship between their returns (Correct answer)
- One always loses when the other gains exactly
Correct answer: There is no linear relationship between their returns
A correlation of 0 indicates no linear relationship; returns of the two assets move independently of each other.
Question 5: The efficient frontier represents portfolios that:
- Maximize return for a given level of risk (Correct answer)
- Guarantee positive returns in all market conditions
- Are fully invested in risk-free assets
- Hold only domestic equities
Correct answer: Maximize return for a given level of risk
The efficient frontier plots the set of portfolios offering the highest expected return for each level of risk.
Question 6: A fund using a 130/30 strategy holds 130% long equity exposure and 30% short exposure. This strategy is best described as:
- A pure index strategy
- A market-neutral hedge fund
- An extended equity strategy using leverage and shorting (Correct answer)
- A fixed-income arbitrage strategy
Correct answer: An extended equity strategy using leverage and shorting
A 130/30 strategy uses proceeds from short positions to fund additional long exposure, creating a modestly leveraged long-biased portfolio.
Question 7: Which investment principle states that once a long-term asset mix is set, it should be maintained regardless of short-term market forecasts?
- Tactical asset allocation
- Strategic asset allocation (Correct answer)
- Dynamic hedging
- Market timing
Correct answer: Strategic asset allocation
Strategic asset allocation establishes a long-term target mix aligned with investor goals and risk tolerance, held consistently over time.
CIFC Investment Strategies and Portfolio Management 3
In a liability-driven investing (LDI) strategy, the primary benchmark for portfolio construction is: