CPM Asset Allocation & Diversification 3

Question 1

Which of the following factors would MOST likely reduce the diversification benefit of adding an asset to a portfolio?

Accepted Answer

A high correlation with existing portfolio holdings

Answer

Diversification benefits decrease as the correlation between the new asset and existing holdings increases; a high correlation means the asset moves similarly to what is already in the portfolio.

Question 2

The Black-Litterman model improves on traditional mean-variance optimization by:

Accepted Answer

Blending market equilibrium returns with investor views to produce more stable allocations

Answer

The Black-Litterman model starts with market equilibrium (implied) returns and adjusts them based on the portfolio manager's views, reducing the instability of pure mean-variance optimization.

Question 3

Dynamic asset allocation responds to changing market conditions by:

Accepted Answer

Adjusting portfolio weights based on valuation signals, economic outlook, or risk metrics

Answer

Dynamic asset allocation actively shifts weights across asset classes in response to changing valuations, economic indicators, or risk environments, blending elements of strategic and tactical approaches.

Question 4

Which of the following best describes home bias in asset allocation?

Accepted Answer

The tendency for investors to overweight domestic investments relative to a globally optimal allocation

Answer

Home bias refers to investors' tendency to allocate a disproportionately large share of their portfolios to domestic assets, often leading to suboptimal diversification.

Question 5

Which asset class is typically considered the most liquid and lowest risk in a portfolio?

Accepted Answer

Cash and cash equivalents

Answer

Cash and cash equivalents (e.g., Treasury bills, money market funds) offer the highest liquidity and lowest risk, though they also provide the lowest long-term returns.

CPM - Certified Portfolio Manager Practice Test

CPM - Certified Portfolio Manager Practice Test

CPM Asset Allocation & Diversification 3