Investment Management & Asset Allocation Flashcards

Under the efficient market hypothesis (EMH) in its semi-strong form, which strategy would be LEAST likely to consistently produce risk-adjusted excess returns?

Answer: Fundamental analysis of publicly available earnings reports

In semi-strong EMH, all publicly available information is already priced in, so fundamental analysis of public data cannot consistently generate alpha.

A client's portfolio suffers a 40% loss. What percentage gain is needed to return to the original portfolio value?

Answer: 67%

A 40% loss means the portfolio is at 60% of its original value; to return to 100%, a gain of 40/60 ≈ 66.7% is required.

Which fixed income duration concept measures the price sensitivity of a bond to a 1% change in interest rates?

Answer: Modified duration

Modified duration estimates the percentage price change of a bond for a 1% (100 basis point) change in yield.

A 65-year-old client has a $2M portfolio and needs $80,000/year in withdrawals. Which initial withdrawal rate does this represent, and how does it compare to the traditional '4% rule'?

Answer: 4.0%; exactly meets the 4% rule threshold

$80,000 ÷ $2,000,000 = 4.0%, which exactly matches the traditional Bengen 4% withdrawal rate guideline.

The Capital Asset Pricing Model (CAPM) states that expected return equals the risk-free rate plus beta multiplied by the market risk premium. If rf = 3%, beta = 1.2, and market return = 9%, what is the expected return?

Answer: 10.2%

CAPM: E(R) = 3% + 1.2 × (9% − 3%) = 3% + 1.2 × 6% = 3% + 7.2% = 10.2%.

A retiree's portfolio is split between a tax-deferred IRA and a taxable brokerage account. For asset location purposes, which asset type is MOST efficiently held in the tax-deferred account?

Answer: High-yield (junk) bonds generating ordinary income

High-yield bonds generate ordinary income taxed at higher rates, so sheltering them in a tax-deferred account maximizes after-tax returns.

Which phenomenon describes investors' tendency to feel the pain of losses approximately twice as intensely as the pleasure of equivalent gains, influencing retirement portfolio decisions?

Answer: Loss aversion

Loss aversion, identified by Kahneman and Tversky, causes investors to weight losses more heavily than gains of the same magnitude, often leading to suboptimal portfolio decisions.