Asset Allocation Flashcards

Which concept refers to the empirical finding that asset allocation decisions account for the majority of portfolio return variability over time?

Answer: Policy portfolio dominance

Research by Brinson, Hood, and Beebower found that investment policy (asset allocation) explains approximately 90% or more of the variability in portfolio returns over time.

In a liability-driven investing (LDI) framework, the primary goal of asset allocation is to:

Answer: Match or immunize the portfolio against future liability cash flows

LDI focuses on structuring assets so their value and cash flows are closely matched to the investor's liabilities, thereby reducing funding risk.

Core-satellite portfolio construction combines which two elements?

Answer: A passively managed core with actively managed satellite positions

Core-satellite combines a large, low-cost passively managed core for broad market exposure with smaller active or alternative satellite positions intended to generate alpha.

Which of the following is a key advantage of including alternative assets in a traditional stock-bond portfolio?

Answer: Potential diversification benefits due to low correlation with traditional assets

Alternative assets such as private equity, real estate, and hedge funds often have low or negative correlations with traditional stocks and bonds, potentially improving the risk-return profile of the overall portfolio.

The 'glide path' concept in target-date funds refers to:

Answer: The gradual shift from growth-oriented to more conservative allocations as the target date approaches

A glide path describes the planned reduction in equity exposure and increase in fixed income exposure over time as an investor approaches their target date, reducing portfolio risk as the horizon shortens.

When rebalancing a portfolio, a 'corridor' or 'threshold' rebalancing strategy triggers a rebalance when:

Answer: An asset class weight drifts outside a predefined band around its target

Threshold (corridor) rebalancing triggers action only when an asset class weight deviates beyond a specified tolerance band from its target, avoiding unnecessary transactions while controlling drift.

Which of the following factors is LEAST likely to be considered when determining an individual investor's appropriate asset allocation?

Answer: The portfolio manager's personal investment preferences

Asset allocation must be driven entirely by the client's objectives and constraints; the portfolio manager's personal preferences are irrelevant and would violate fiduciary duty.