CIMA Asset Allocation 3

Question 1

Which asset allocation model explicitly accounts for the investor's tolerance for shortfall risk by maximizing expected return subject to a minimum acceptable return constraint?

Accepted Answer

Safety-first (Roy's criterion)

Answer

Roy's safety-first criterion selects the portfolio that minimizes the probability of falling below a threshold return level, prioritizing downside protection over maximum expected return.

Question 2

In factor-based (smart beta) asset allocation, exposures are typically structured around factors such as:

Accepted Answer

Value, size, momentum, quality, and low volatility

Answer

Factor-based allocation targets systematic return premia such as value, size, momentum, quality, and low volatility, which have historically been associated with excess returns over time.

Question 3

Which statement best describes the concept of 'home bias' in asset allocation?

Accepted Answer

Investors' tendency to over-allocate to domestic securities relative to their global market weight

Answer

Home bias is the well-documented tendency for investors to hold a disproportionately large share of their portfolios in domestic securities, reducing the diversification benefits of global investing.

Question 4

A defined benefit pension plan with a long investment horizon and stable contribution base would MOST likely be able to tolerate:

Accepted Answer

Higher allocations to illiquid asset classes such as private equity

Answer

A long-horizon, well-funded defined benefit plan can afford to accept illiquidity risk in exchange for the potential liquidity premium embedded in private equity and similar asset classes.

Question 5

Which of the following best describes the role of capital market assumptions (CMAs) in the asset allocation process?

Accepted Answer

They provide forward-looking estimates of returns, risks, and correlations used as inputs for portfolio optimization

Answer

Capital market assumptions are forward-looking estimates of expected returns, standard deviations, and correlations for asset classes, serving as the key inputs to the optimization models used in strategic asset allocation.

(CIMA) Certified Investment Management Analyst Practice Test

(CIMA) Certified Investment Management Analyst Practice Test

CIMA Asset Allocation 3