Financial Advisor Investment Planning and Portfolio Management 4 — Questions and Answers
Question 1: A client's portfolio has a beta of 1.4. If the market rises 10%, what is the expected portfolio return according to the Capital Asset Pricing Model (CAPM)?
- 10%
- 14% (Correct answer)
- 4%
- 1.4%
Correct answer: 14%
Beta of 1.4 means the portfolio is expected to move 1.4x the market, so a 10% market gain yields an expected 14% portfolio return.
Question 2: Which rebalancing strategy triggers a portfolio adjustment only when an asset class drifts beyond a defined percentage threshold?
- Calendar rebalancing
- Constant-mix rebalancing
- Threshold (percentage-of-portfolio) rebalancing (Correct answer)
- Buy-and-hold rebalancing
Correct answer: Threshold (percentage-of-portfolio) rebalancing
Threshold rebalancing triggers trades when an allocation deviates beyond a preset band (e.g., ±5%), rather than on a fixed schedule.
Question 3: An investor buys a stock at $50, sells a call option on it for $3, and sets a limit sell at $55. This strategy is best described as a:
- Protective put
- Covered call (Correct answer)
- Collar
- Straddle
Correct answer: Covered call
Selling a call against an existing stock position is a covered call, which generates premium income while capping upside.
Question 4: The Sharpe ratio of Portfolio A is 0.9 and Portfolio B is 0.6. What does this indicate?
- Portfolio A has higher total return
- Portfolio A provides more return per unit of total risk (Correct answer)
- Portfolio B has lower beta
- Portfolio A has lower standard deviation
Correct answer: Portfolio A provides more return per unit of total risk
The Sharpe ratio measures excess return per unit of total risk (standard deviation), so Portfolio A delivers better risk-adjusted performance.
Question 5: A 60/40 equity/bond portfolio drifts to 70/30 after a strong equity rally. Selling equities to restore the 60/40 target is an example of:
- Tactical asset allocation
- Dollar-cost averaging
- Strategic rebalancing (Correct answer)
- Sector rotation
Correct answer: Strategic rebalancing
Selling outperforming assets to restore the original target allocation is strategic (or systematic) rebalancing.
Question 6: Which measure captures only the downside volatility of a portfolio, treating upside variance as acceptable?
- Standard deviation
- Beta
- Sortino ratio (Correct answer)
- Coefficient of variation
Correct answer: Sortino ratio
The Sortino ratio uses downside deviation in place of standard deviation, penalizing only harmful (below-target) volatility.
Question 7: A client wants inflation protection and steady income in retirement. Which asset class is MOST appropriate to add to their portfolio?
- Growth stocks
- Treasury Inflation-Protected Securities (TIPS) (Correct answer)
- High-yield corporate bonds
- Emerging market equities
Correct answer: Treasury Inflation-Protected Securities (TIPS)
TIPS adjust their principal with inflation and pay interest on the adjusted value, directly protecting purchasing power.
Financial Advisor Investment Planning and Portfolio Management 4
A client's portfolio has a beta of 1.4.
If the market rises 10%, what is the expected portfolio return according to the Capital Asset Pricing Model (CAPM)?