Asset Allocation & Risk Management Flashcards

Tactical asset allocation is best described as:

Answer: Short-term deliberate deviations from strategic weights to exploit perceived opportunities

TAA makes short-term tilts away from the strategic allocation based on market views.

Which statement about rebalancing corridors is correct?

Answer: Higher correlation with the rest of the portfolio justifies wider corridors

Highly correlated assets drift together with the portfolio, so wider corridors are acceptable.

Stress testing differs from VaR mainly because it:

Answer: Evaluates portfolio losses under specific extreme scenarios

Stress tests examine losses under specified extreme events that VaR models may underweight.

A pension plan with long-duration liabilities that wants to reduce surplus volatility should most likely:

Answer: Increase long-duration bond holdings

Matching asset duration to liability duration hedges interest rate risk to surplus.

In a portfolio, the marginal contribution to risk of an asset depends on:

Answer: The asset's covariance with the overall portfolio

An asset's risk contribution depends on its covariance (or beta) relative to the total portfolio.

Which hedging tool provides downside protection while keeping upside participation, at an upfront cost?

Answer: Buying protective puts

A protective put sets a floor on losses while keeping upside, for the cost of the premium.

Which risk measure is most appropriate for evaluating an active manager relative to a benchmark?

Answer: Tracking error

Tracking error is the standard deviation of active returns versus the benchmark.