Investment Strategies & Portfolio Management Flashcards

Which investment strategy aims to replicate the risk/return profile of a liability stream, minimizing the surplus volatility between assets and liabilities?

Answer: Liability-Driven Investing (LDI)

LDI structures the asset portfolio to match the duration and cash flow characteristics of liabilities, reducing funded-status volatility.

The Black-Litterman model improves upon mean-variance optimization primarily by:

Answer: Incorporating investor views with market equilibrium returns

Black-Litterman blends the investor's subjective views with implied equilibrium returns derived from market capitalization weights to produce more stable portfolios.

A 60/40 portfolio refers to an allocation of:

Answer: 60% equities and 40% fixed income

The classic 60/40 portfolio allocates 60% to equities for growth and 40% to bonds for stability and income, serving as a traditional balanced benchmark.

Which scenario best illustrates a 'barbell' fixed income strategy?

Answer: Concentration in short-term and long-term bonds with little intermediate exposure

A barbell strategy concentrates holdings at both ends of the maturity spectrum, balancing liquidity from short-term bonds with yield from long-term bonds.

What is 'portable alpha' in portfolio management?

Answer: Separating alpha generation from beta exposure and overlaying alpha onto any benchmark

Portable alpha uses derivatives to gain desired market (beta) exposure while separately investing in an alpha-generating strategy, decoupling the two return sources.

Which risk measure focuses solely on the downside deviation below a target return, unlike standard deviation which penalizes upside volatility equally?

Answer: Sortino ratio denominator (downside deviation)

Downside deviation, used in the Sortino ratio, only counts returns that fall below the minimum acceptable return, ignoring favorable upside volatility.

An RFC advisor recommends increasing a client's international equity allocation from 15% to 30%. Which risk is most directly increased by this change?

Answer: Currency risk

Increasing international equity exposure raises currency risk because foreign-denominated returns must be converted back to USD, adding exchange rate volatility.