CPT Portfolio Diversification Strategies 3

Question 1

Which diversification strategy involves spreading investments across different points in time to reduce timing risk?

Accepted Answer

Dollar-cost averaging

Answer

Dollar-cost averaging reduces timing risk by investing fixed amounts at regular intervals, buying more shares when prices are low and fewer when prices are high.

Question 2

Which asset class historically has the lowest correlation with U.S. large-cap equities, providing the greatest diversification benefit?

Accepted Answer

Commodities

Answer

Commodities tend to have low or negative correlation with equities, especially during inflationary periods when stocks struggle.

Question 3

A portfolio has a correlation of -1 between its two assets. What happens to portfolio variance as weight shifts between them?

Accepted Answer

Portfolio variance can theoretically be reduced to zero at the optimal weighting

Answer

With perfect negative correlation, there exists a specific weighting combination at which the two assets' movements completely offset each other, yielding zero portfolio variance.

Question 4

An investor uses a 'core-satellite' approach. The core allocation typically consists of:

Accepted Answer

Broad, low-cost, passively managed index funds providing market exposure

Answer

In a core-satellite portfolio, the core is a diversified, low-cost passive base, while satellites are active or alternative positions seeking alpha.

Question 5

What does 'geographic diversification' primarily protect against?

Accepted Answer

Country-specific economic downturns, political instability, and regulatory changes

Answer

Geographic diversification reduces the impact of adverse events in any single country, such as recession, political upheaval, or abrupt regulatory shifts.

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CPT Portfolio Diversification Strategies 3