Asset Allocation & Risk Management Flashcards
7 cards from real CIM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Asset Allocation & Risk Management flashcards as text
Which allocation model blends market-equilibrium implied returns with investor views?
Answer: Black-Litterman model
Black-Litterman starts with reverse-optimized equilibrium returns and tilts them toward investor views.
A major criticism of unconstrained mean-variance optimization is that it:
Answer: Produces highly concentrated portfolios sensitive to input errors
MVO maximizes errors in its inputs, leading to extreme, unstable weights.
A risk parity portfolio allocates capital so that:
Answer: Each asset contributes equally to total portfolio risk
Risk parity equalizes risk contributions, typically overweighting low-volatility assets such as bonds.
Which method best captures path-dependent outcomes such as multi-period withdrawals and taxes?
Answer: Monte Carlo simulation
Monte Carlo simulation models many multi-period paths, including cash flows and taxes.
Which ratio measures excess return per unit of downside deviation?
Answer: Sortino ratio
The Sortino ratio uses downside deviation below a target instead of total volatility.
Systematic risk differs from unsystematic risk because systematic risk:
Answer: Cannot be diversified away
Market-wide risk remains no matter how many securities are held.
An investor's tolerance for risk is best described as depending on:
Answer: Both ability and willingness to bear risk
Risk tolerance reflects both financial capacity and psychological willingness, with the more conservative one usually prevailing.