CPS Portfolio Construction and Design

Question 1

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

Accepted Answer

Diversification across asset classes

Answer

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

Question 2

What does asset allocation primarily determine in a portfolio?

Accepted Answer

The overall risk and return profile

Answer

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

Question 3

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

Accepted Answer

To establish investment objectives and constraints

Answer

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

Question 4

What is 'rebalancing' in portfolio management?

Accepted Answer

Restoring a portfolio to its target asset allocation

Answer

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

Question 5

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

Accepted Answer

Ensuring sufficient income and capital preservation

Answer

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

CPS - Certified Portfolio Specialist Practice Test