Investment Policy & Portfolio Construction Flashcards
7 cards from real CIMA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Investment Policy & Portfolio Construction flashcards as text
Which of the following is an example of a 'liquidity constraint' that would be documented in an IPS?
Answer: A need to withdraw $50,000 annually for living expenses
Liquidity constraints specify expected cash outflow needs, which require the portfolio to maintain sufficient liquid assets to meet withdrawals without forced asset sales.
A 'goals-based' portfolio construction approach differs from a mean-variance approach primarily because it:
Answer: Segments assets into mental accounts tied to specific life goals
Goals-based investing builds separate sub-portfolios (mental accounts) aligned to distinct goals such as retirement, education, or a legacy, rather than optimizing one aggregate portfolio.
Strategic asset allocation (SAA) is BEST described as:
Answer: A long-term target mix of asset classes aligned with the investor's IPS objectives
SAA establishes a long-term policy portfolio that reflects the investor's return objectives, risk tolerance, and constraints as stated in the IPS.
Which statement about tactical asset allocation (TAA) is MOST accurate?
Answer: TAA involves temporary, deliberate deviations from SAA to exploit market opportunities
TAA makes short-term shifts away from the strategic benchmark weights based on market views, intending to add alpha before reverting to the policy mix.
When evaluating a client's 'ability to bear risk,' which factor is MOST relevant?
Answer: The client's financial capacity to sustain losses without jeopardizing goals
Ability to bear risk is an objective, financial measure based on wealth, income stability, and time horizon, distinct from the subjective willingness to take risk.
A foundation with a perpetual time horizon and 5% annual spending requirement should set its long-term portfolio return objective at a MINIMUM of:
Answer: 5% plus inflation plus investment expenses
To preserve real purchasing power indefinitely, the foundation must earn at least enough to cover its spending rate, inflation, and management costs.
Which portfolio construction technique explicitly accounts for the non-normality of asset return distributions?
Answer: Mean-CVaR optimization
Mean-CVaR (Conditional Value-at-Risk) optimization uses downside tail risk as its measure, directly addressing skewness and fat tails that MVO ignores.