RFC Investment Strategies & Portfolio Management 2 — Questions and Answers
Question 1: Which portfolio rebalancing strategy involves selling assets that have exceeded their target allocation and buying those that have fallen below?
- Tactical rebalancing
- Strategic rebalancing
- Threshold-based rebalancing (Correct answer)
- Calendar rebalancing
Correct answer: Threshold-based rebalancing
Threshold-based rebalancing triggers trades when an asset class drifts beyond a set percentage band from its target, maintaining intended risk exposure.
Question 2: A client has a portfolio with a Sharpe ratio of 0.85 and a Treynor ratio significantly lower than peers. What does this most likely indicate?
- The portfolio has low total risk but high systematic risk (Correct answer)
- The portfolio has high alpha generation
- The portfolio is well-diversified with low unsystematic risk
- The manager is taking excessive idiosyncratic risk
Correct answer: The portfolio has low total risk but high systematic risk
A high Sharpe (total risk) but low Treynor (systematic/beta risk) ratio suggests the portfolio carries substantial beta relative to its total volatility.
Question 3: The core-satellite investment approach typically uses which type of holding as the 'core' component?
- High-yield bond funds
- Actively managed sector funds
- Low-cost index or passive funds (Correct answer)
- Alternative investments like hedge funds
Correct answer: Low-cost index or passive funds
The core is typically a broad, low-cost passive index fund providing market-rate returns, while satellite positions seek alpha through active management.
Question 4: Which term describes the strategy of overweighting asset classes expected to outperform in the short-to-medium term while maintaining a long-term strategic allocation?
- Dynamic asset allocation
- Tactical asset allocation (Correct answer)
- Constant-mix allocation
- Buy-and-hold allocation
Correct answer: Tactical asset allocation
Tactical asset allocation (TAA) involves short-term deviations from the strategic benchmark to exploit perceived market opportunities.
Question 5: A portfolio manager applies a momentum strategy. Which behavior does this strategy exploit?
- Mean reversion of overvalued securities
- Persistence of recent price trends (Correct answer)
- Volatility clustering in equity markets
- Correlation breakdown during market stress
Correct answer: Persistence of recent price trends
Momentum strategies buy recent winners and short recent losers, betting that recent price trends will continue in the near term.
Question 6: What is the primary risk of a laddered bond portfolio strategy?
- Duration mismatch with liabilities
- Reinvestment risk at prevailing rates (Correct answer)
- Excessive concentration in a single issuer
- Lack of liquidity for all maturities
Correct answer: Reinvestment risk at prevailing rates
As bonds in a ladder mature, proceeds are reinvested at whatever interest rates prevail at that time, exposing the investor to reinvestment risk.
Question 7: In the context of factor investing, which factor has been shown to provide a premium because investors demand compensation for holding illiquid assets?
- Value factor
- Size factor (Correct answer)
- Quality factor
- Low volatility factor
Correct answer: Size factor
The size (small-cap) premium is partly explained by the illiquidity of small-cap stocks, for which investors require additional compensation.
RFC Investment Strategies & Portfolio Management 2
Which portfolio rebalancing strategy involves selling assets that have exceeded their target allocation and buying those that have fallen below?