Asset Allocation & Diversification Flashcards
6 cards from real CPM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Asset Allocation & Diversification flashcards as text
Which of the following factors would MOST likely reduce the diversification benefit of adding an asset to a portfolio?
Answer: A high correlation with existing portfolio holdings
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.
The Black-Litterman model improves on traditional mean-variance optimization by:
Answer: Blending market equilibrium returns with investor views to produce more stable allocations
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.
Dynamic asset allocation responds to changing market conditions by:
Answer: Adjusting portfolio weights based on valuation signals, economic outlook, or risk metrics
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.
Which of the following best describes home bias in asset allocation?
Answer: The tendency for investors to overweight domestic investments relative to a globally optimal allocation
Home bias refers to investors' tendency to allocate a disproportionately large share of their portfolios to domestic assets, often leading to suboptimal diversification.
Which asset class is typically considered the most liquid and lowest risk in a portfolio?
Answer: Cash and cash equivalents
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.
A portfolio manager increases the allocation to emerging market equities. Which risk factor is MOST likely to increase?
Answer: Geopolitical and currency risk
Emerging market equities introduce elevated geopolitical risk and currency risk due to less stable political environments and exchange rate volatility relative to developed markets.