CIMA Asset Allocation

Question 1

Which asset allocation approach involves setting fixed target weights for each asset class and periodically rebalancing back to those targets?

Accepted Answer

Strategic asset allocation

Answer

Strategic asset allocation establishes long-term target weights based on an investor's objectives and risk tolerance, with periodic rebalancing to maintain those targets.

Question 2

Tactical asset allocation (TAA) differs from strategic asset allocation primarily in that TAA:

Accepted Answer

Makes short-term deviations from strategic weights based on market views

Answer

Tactical asset allocation involves deliberately deviating from strategic weights in the short term to exploit perceived market mispricings or macroeconomic opportunities.

Question 3

In the context of asset allocation, which method uses expected returns, variances, and covariances to identify the optimal portfolio on the efficient frontier?

Accepted Answer

Mean-variance optimization (MVO)

Answer

Mean-variance optimization, developed by Markowitz, uses expected returns, variances, and pairwise covariances to construct portfolios that maximize return for a given level of risk.

Question 4

A major limitation of mean-variance optimization is that it:

Accepted Answer

Is highly sensitive to small changes in input estimates

Answer

MVO is notoriously sensitive to input estimates; small changes in expected returns or covariances can produce dramatically different optimal allocations, often leading to extreme, concentrated portfolios.

Question 5

The Black-Litterman model improves on traditional MVO by:

Accepted Answer

Combining market equilibrium returns with investor views

Answer

Black-Litterman blends implied equilibrium returns (derived from market capitalization weights) with the investor's own views, producing more stable and intuitive optimal portfolios.

(CIMA) Certified Investment Management Analyst Practice Test

(CIMA) Certified Investment Management Analyst Practice Test

CIMA Asset Allocation