CSC Portfolio Management Process 4 — Questions and Answers
Question 1: Which of the following best illustrates a 'time horizon' constraint in a portfolio?
- A pension fund that must pay retirees monthly starting in 5 years (Correct answer)
- A portfolio manager's preference for growth stocks
- The current level of interest rates
- A client's desire to outperform the TSX Composite
Correct answer: A pension fund that must pay retirees monthly starting in 5 years
A time horizon constraint reflects when the client needs the funds, directly affecting how much risk and illiquidity can be accepted.
Question 2: The efficient frontier in portfolio theory represents portfolios that:
- Have the highest return regardless of risk
- Offer the maximum expected return for each level of risk (Correct answer)
- Consist only of risk-free assets
- Are equally weighted across all asset classes
Correct answer: Offer the maximum expected return for each level of risk
The efficient frontier plots portfolios that achieve the highest possible return for a given level of risk, representing optimal diversification.
Question 3: A client instructs their portfolio manager not to invest more than 10% of the portfolio in any single issuer. This is an example of which type of constraint?
- Regulatory constraint
- Concentration limit / unique circumstance (Correct answer)
- Liquidity constraint
- Tax constraint
Correct answer: Concentration limit / unique circumstance
A concentration limit set by the client to cap exposure to any single issuer is a unique circumstance constraint documented in the IPS.
Question 4: Which performance measurement approach calculates returns that are unaffected by the timing of client cash flows?
- Money-weighted rate of return
- Simple holding period return
- Time-weighted rate of return (Correct answer)
- Annualized compound return
Correct answer: Time-weighted rate of return
The time-weighted rate of return eliminates the impact of external cash flows, making it the standard for evaluating portfolio manager skill.
Question 5: A manager who consistently takes on more systematic risk than the benchmark to generate higher returns is said to be generating returns through:
- Alpha generation
- Beta exposure (Correct answer)
- Factor timing
- Security selection
Correct answer: Beta exposure
Returns driven by higher exposure to systematic market risk (beta) reflect risk-taking rather than manager skill (alpha).
Question 6: When comparing two portfolios with identical returns, a risk-averse investor would prefer the one with:
- Higher standard deviation
- Lower Sharpe ratio
- Lower standard deviation (Correct answer)
- Greater beta
Correct answer: Lower standard deviation
A risk-averse investor prefers to achieve the same return with less volatility, meaning the portfolio with lower standard deviation is preferred.
Question 7: In the context of portfolio monitoring, 'rebalancing bands' (also called tolerance bands) are used to:
- Set the maximum allowable portfolio return
- Define how far an asset weight can drift before triggering rebalancing (Correct answer)
- Measure the portfolio manager's performance versus the benchmark
- Determine the client's risk tolerance score
Correct answer: Define how far an asset weight can drift before triggering rebalancing
Rebalancing bands specify acceptable drift ranges around target weights, triggering rebalancing only when a threshold is breached to balance discipline and transaction costs.
CSC Portfolio Management Process 4
Which of the following best illustrates a 'time horizon' constraint in a portfolio?