IFC Constructing Investment Portfolios 4 — Questions and Answers
Question 1: A client with a moderate risk profile asks for a portfolio recommendation. Which allocation is most appropriate?
- 100% equities
- 80% equities / 20% fixed income
- 50% equities / 50% fixed income (Correct answer)
- 100% GICs
Correct answer: 50% equities / 50% fixed income
A 50/50 equity/fixed-income split balances growth potential with capital preservation, consistent with a moderate risk tolerance.
Question 2: Which of the following best describes 'home bias' in portfolio construction?
- Overweighting domestic securities relative to a globally diversified benchmark (Correct answer)
- Investing only in real estate assets
- Preferring growth stocks over value stocks
- Holding more cash during periods of market uncertainty
Correct answer: Overweighting domestic securities relative to a globally diversified benchmark
Home bias is the tendency for investors to over-allocate to their domestic market, reducing international diversification benefits.
Question 3: Which type of fund is designed to automatically adjust its asset allocation as the target date approaches?
- Money market fund
- Target-date (lifecycle) fund (Correct answer)
- Sector-specific equity fund
- Hedge fund
Correct answer: Target-date (lifecycle) fund
Target-date funds automatically shift from higher equity exposure to more conservative fixed-income allocations as the specified retirement or goal date nears.
Question 4: What is the primary advantage of using ETFs in a portfolio construction strategy?
- Guaranteed capital protection
- Low-cost, transparent, and tax-efficient market exposure (Correct answer)
- Active management by a professional portfolio manager
- Guaranteed higher returns than actively managed funds
Correct answer: Low-cost, transparent, and tax-efficient market exposure
ETFs provide diversified market exposure at low cost, with intraday liquidity and generally greater tax efficiency compared to traditional mutual funds.
Question 5: A portfolio manager adds a real return bond to a client's portfolio. What primary risk is being hedged?
- Credit risk
- Inflation risk (Correct answer)
- Currency risk
- Liquidity risk
Correct answer: Inflation risk
Real return bonds (like Canadian RRBs) pay returns linked to the Consumer Price Index, protecting the portfolio's purchasing power against inflation.
Question 6: Which of the following is a key drawback of over-diversification in a portfolio?
- It increases unsystematic risk
- It may dilute returns and make the portfolio resemble an index at higher cost (Correct answer)
- It eliminates all market risk
- It guarantees underperformance relative to the benchmark
Correct answer: It may dilute returns and make the portfolio resemble an index at higher cost
Over-diversification can reduce the portfolio's ability to outperform because returns converge toward average market performance, negating the benefit of active selection at a potentially higher cost.
Question 7: When constructing a fixed-income portfolio, 'laddering' refers to:
- Investing only in the longest-duration bonds available
- Staggering bond maturities across multiple time periods (Correct answer)
- Concentrating holdings in high-yield bonds
- Matching duration exactly to a liability
Correct answer: Staggering bond maturities across multiple time periods
A bond ladder spreads maturities across short, medium, and long terms so that portions mature regularly, reducing interest rate risk and providing reinvestment opportunities.
IFC Constructing Investment Portfolios 4
A client with a moderate risk profile asks for a portfolio recommendation.
Which allocation is most appropriate?