Investment Policy & Planning Flashcards

What is a well-known weakness of unconstrained mean-variance optimization?

Answer: It is highly sensitive to input estimates and can produce concentrated corner solutions

Small changes in expected returns can cause large swings in optimal weights.

The Black-Litterman model starts from which set of expected returns?

Answer: Equilibrium returns implied by market-capitalization weights

Black-Litterman reverse-optimizes market weights to get implied returns, then blends in the investor's views.

In surplus optimization, the efficient frontier is plotted using:

Answer: Expected surplus return against surplus volatility

Surplus optimization applies mean-variance analysis to assets minus liabilities.

Tactical asset allocation refers to:

Answer: Deliberate short-term deviations from the strategic allocation to exploit perceived opportunities

TAA makes temporary over- and underweights relative to the SAA based on short-term views.

A constant-proportion portfolio insurance (CPPI) strategy tends to do worst in which kind of market?

Answer: Flat markets with frequent reversals

CPPI buys after rises and sells after declines, so choppy markets with reversals erode its value.

With a minimum acceptable return of 3%, which portfolio is preferred under Roy's safety-first criterion?

Answer: E(R)=7%, σ=6%

Its safety-first ratio, (7−3)/6 = 0.67, is the highest among the choices.

How often should an IPS normally be reviewed?

Answer: At least annually and whenever the client's circumstances change materially

The IPS should be updated regularly and after major life or market events so it stays relevant.