CSC Portfolio Management Process 5 — Questions and Answers
Question 1: Which statement about tax considerations in portfolio management is most accurate?
- Tax considerations only apply to corporate investors
- After-tax returns are more relevant than pre-tax returns for taxable accounts (Correct answer)
- Portfolio managers in Canada ignore taxes when constructing portfolios
- Tax-loss harvesting increases a portfolio's gross return
Correct answer: After-tax returns are more relevant than pre-tax returns for taxable accounts
For taxable investors, after-tax returns determine actual wealth accumulation, so tax-efficient strategies are a critical part of portfolio construction.
Question 2: A foundation with a mandate to fund charitable grants indefinitely has which type of investment objective?
- Capital preservation with a short time horizon
- Growth and income with a perpetual time horizon (Correct answer)
- Maximum income with no regard for capital growth
- Speculative growth with a 5-year horizon
Correct answer: Growth and income with a perpetual time horizon
A perpetual institution must grow the portfolio to sustain distributions indefinitely, requiring a balance of growth and income over an unlimited time horizon.
Question 3: Which of the following is a consequence of excessive portfolio turnover?
- Reduced tracking error
- Increased transaction costs and potential tax drag (Correct answer)
- Improved benchmark alignment
- Lower portfolio volatility
Correct answer: Increased transaction costs and potential tax drag
High portfolio turnover generates transaction costs (commissions, bid-ask spreads) and may trigger taxable capital gains, both of which reduce net returns.
Question 4: The Sharpe ratio measures portfolio performance by comparing excess return to:
- Total portfolio assets under management
- The portfolio's beta relative to the market
- The portfolio's total risk as measured by standard deviation (Correct answer)
- The benchmark's standard deviation
Correct answer: The portfolio's total risk as measured by standard deviation
The Sharpe ratio divides excess return (portfolio return minus risk-free rate) by the portfolio's standard deviation, rewarding efficiency in taking on total risk.
Question 5: A portfolio manager moves 15% of a balanced portfolio from equities to bonds because she believes a recession is imminent. This action is an example of:
- Strategic asset allocation
- Tactical asset allocation (Correct answer)
- Security selection
- Portfolio rebalancing to target weights
Correct answer: Tactical asset allocation
Tactical asset allocation involves deliberately deviating from strategic target weights in the short term based on market or economic views.
Question 6: Which of the following statements about benchmarks in portfolio management is correct?
- A benchmark should be constructed after the performance period ends
- A valid benchmark must be investable, measurable, and agreed upon in advance (Correct answer)
- Benchmarks are optional for institutional portfolios
- The risk-free rate is the most appropriate benchmark for equity portfolios
Correct answer: A valid benchmark must be investable, measurable, and agreed upon in advance
A valid benchmark must be specified in advance, investable, measurable, and reflective of the portfolio's investment universe and style.
Question 7: In a defined benefit pension plan, the portfolio manager's primary objective is to:
- Maximize absolute returns without regard to liabilities
- Generate returns sufficient to meet future pension obligations to plan members (Correct answer)
- Minimize volatility by holding only government bonds
- Achieve returns that exceed the equity market benchmark
Correct answer: Generate returns sufficient to meet future pension obligations to plan members
A defined benefit plan must ensure assets are sufficient to cover promised future pension payments, making liability-matching the central objective.
CSC Portfolio Management Process 5
Which statement about tax considerations in portfolio management is most accurate?