Portfolio Construction and Design Flashcards

Which principle is fundamental to portfolio construction in the CPS framework?

Answer: Diversification across asset classes

Diversification across asset classes is a cornerstone of sound portfolio construction to manage risk while pursuing returns.

What does asset allocation primarily determine in a portfolio?

Answer: The overall risk and return profile

Asset allocation determines the overall risk and return profile of a portfolio by distributing investments among asset categories.

In portfolio design, what is the purpose of a policy statement?

Answer: To establish investment objectives and constraints

An investment policy statement establishes the client's objectives, risk tolerance, and constraints to guide portfolio construction.

What is 'rebalancing' in portfolio management?

Answer: Restoring a portfolio to its target asset allocation

Rebalancing restores a portfolio to its original or desired target allocation after market movements have caused drift.

Which factor is most critical when designing a portfolio for a retired client?

Answer: Ensuring sufficient income and capital preservation

For retired clients, ensuring sufficient income and capital preservation is paramount since they typically cannot recover from large losses.

What does 'tactical asset allocation' differ from 'strategic asset allocation' in?

Answer: Tactical makes short-term deviations; strategic sets long-term targets

Tactical asset allocation makes short-term deviations from the long-term strategic target to exploit market opportunities.