Investment Advisor Client Suitability and Portfolio Management 2 — Questions and Answers
Question 1: Which asset allocation approach involves periodically resetting a portfolio to its original target weights?
- Tactical asset allocation
- Rebalancing (Correct answer)
- Buy-and-hold
- Market timing
Correct answer: Rebalancing
Rebalancing involves periodically buying and selling assets to restore the portfolio to its target allocation after market movements have shifted the weights.
Question 2: A client with a high risk tolerance and a 30-year time horizon is generally most appropriate for a portfolio weighted toward:
- Short-term Treasury bills
- Money market funds
- Equities with a small fixed income allocation (Correct answer)
- Certificates of deposit only
Correct answer: Equities with a small fixed income allocation
Long time horizons and high risk tolerance support heavier equity allocations, as equity markets tend to outperform fixed income over long periods despite short-term volatility.
Question 3: The Sharpe Ratio measures:
- Total portfolio return
- Excess return per unit of total risk (Correct answer)
- Portfolio correlation to a benchmark
- The dividend yield of a portfolio
Correct answer: Excess return per unit of total risk
The Sharpe Ratio calculates a portfolio's excess return above the risk-free rate per unit of standard deviation, measuring risk-adjusted performance.
Question 4: A client who panics and sells investments during market downturns is exhibiting which behavioral bias?
- Confirmation bias
- Loss aversion (Correct answer)
- Anchoring bias
- Overconfidence bias
Correct answer: Loss aversion
Loss aversion, a core concept in behavioral finance, describes the tendency for people to feel the pain of losses more intensely than equivalent gains, driving panic selling.
Question 5: In a client needs analysis, 'liquidity needs' refer to:
- The client's desire for dividend income
- The need for readily accessible funds to cover short-term obligations (Correct answer)
- The preference for liquid stock markets
- The client's desire to avoid real estate investments
Correct answer: The need for readily accessible funds to cover short-term obligations
Liquidity needs represent how much of the client's portfolio must be readily accessible for near-term spending, emergencies, or obligations.
Question 6: Which portfolio strategy involves adjusting asset allocation in response to changing market conditions, rather than maintaining a fixed target?
- Strategic asset allocation
- Tactical asset allocation (Correct answer)
- Passive indexing
- Dollar-cost averaging
Correct answer: Tactical asset allocation
Tactical asset allocation actively shifts portfolio weights based on short-term market opportunities or forecasts, deviating from the long-term strategic target.
Investment Advisor Client Suitability and Portfolio Management 2
Which asset allocation approach involves periodically resetting a portfolio to its original target weights?