CSC Portfolio Management Process 3 — Questions and Answers
Question 1: A portfolio manager uses the capital market expectations to forecast asset class returns, risks, and correlations. This information is primarily used to:
- Satisfy regulatory filing requirements
- Determine optimal asset class weights in the portfolio (Correct answer)
- Calculate the manager's performance fee
- Select individual securities within each asset class
Correct answer: Determine optimal asset class weights in the portfolio
Capital market expectations provide the forward-looking inputs needed to construct and optimize asset class weightings within a portfolio.
Question 2: Which risk measure quantifies the potential loss in a portfolio over a specific time period at a given confidence level?
- Standard deviation
- Beta
- Value at Risk (VaR) (Correct answer)
- Sharpe ratio
Correct answer: Value at Risk (VaR)
Value at Risk (VaR) estimates the maximum expected loss over a defined period at a stated confidence level, such as 95% or 99%.
Question 3: An investor's 'ability to take risk' is most closely related to:
- Their emotional comfort with market downturns
- Their financial capacity to absorb losses without jeopardizing goals (Correct answer)
- Their preference for aggressive investments
- Their past investment experience
Correct answer: Their financial capacity to absorb losses without jeopardizing goals
Ability to take risk is an objective measure based on financial circumstances such as income stability, wealth, liabilities, and time horizon.
Question 4: Which of the following scenarios would most likely trigger a formal review and update of a client's IPS?
- A 2% decline in the S&P 500 over one month
- A client getting married and having children (Correct answer)
- Slight fluctuations in short-term interest rates
- A portfolio manager changing their investment style
Correct answer: A client getting married and having children
Major life events such as marriage or having children significantly change a client's financial situation, goals, and risk profile, requiring an IPS update.
Question 5: In the top-down approach to portfolio construction, the first decision made is:
- Selecting individual stocks based on fundamental analysis
- Determining the overall asset class mix (Correct answer)
- Calculating the portfolio's expected return
- Evaluating each security's dividend yield
Correct answer: Determining the overall asset class mix
The top-down approach begins with macroeconomic analysis to determine asset allocation, then moves to sector selection, and finally individual security selection.
Question 6: Diversification reduces portfolio risk primarily by combining assets that have:
- High positive correlations with each other
- Low or negative correlations with each other (Correct answer)
- Identical return distributions
- The same beta relative to the market
Correct answer: Low or negative correlations with each other
Assets with low or negative correlations do not move together, so losses in one may be offset by gains in another, reducing overall portfolio volatility.
Question 7: A portfolio's actual return of 12% compared to its benchmark return of 10% reflects:
- Negative alpha
- Positive alpha (Correct answer)
- Zero tracking error
- Increased systematic risk
Correct answer: Positive alpha
Outperforming the benchmark by 2% represents positive alpha, indicating value added by the portfolio manager's decisions.
CSC Portfolio Management Process 3
A portfolio manager uses the capital market expectations to forecast asset class returns, risks, and correlations.
This information is primarily used to: