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
What is the PRIMARY purpose of a policy rebalancing band (e.g., ±5% around each target allocation)?
Answer: To avoid unnecessary transaction costs while keeping allocations within acceptable risk ranges
Rebalancing bands reduce transaction costs and taxes by tolerating small drifts before triggering a rebalance, balancing cost efficiency with risk control.
A client has both a high willingness and a high ability to bear risk. An advisor should:
Answer: Construct an aggressive portfolio consistent with both dimensions
When both willingness and ability to bear risk are high and aligned, the advisor constructs an appropriately aggressive portfolio without conflict.
Which of the following constraints in an IPS would MOST likely apply to a taxable individual investor but NOT to a tax-exempt pension fund?
Answer: Preference for tax-advantaged securities such as municipal bonds
Tax-exempt pension funds have no tax liability, so tax-advantaged instruments like municipal bonds offer no benefit; individual taxable investors gain from their lower after-tax yields.
The 'liability-relative' approach to investing is MOST appropriate for which investor type?
Answer: A defined benefit pension plan with near-term benefit obligations
Liability-relative investing (e.g., LDI) is designed for entities with explicit future obligations, such as DB pension plans, aligning assets with liability duration and cash flows.
A portfolio's 'Sharpe ratio' measures:
Answer: Excess return per unit of total (standard deviation) risk
The Sharpe ratio = (Portfolio Return – Risk-Free Rate) / Standard Deviation, expressing how much excess return the investor earns per unit of total volatility.
Which scenario BEST illustrates a 'return objective' conflict in portfolio construction?
Answer: A client seeks 10% annual returns but also demands capital preservation with no drawdowns
Seeking high returns (10%) while demanding capital preservation and zero drawdowns is internally contradictory because higher returns require accepting risk and potential losses.
In portfolio construction, 'factor tilting' refers to:
Answer: Systematically overweighting securities with specific risk factor exposures (e.g., value, momentum, low volatility)
Factor tilting deliberately overweights securities that score highly on empirically documented risk premia factors, such as value, size, momentum, or low volatility.