RMA Investment Management & Asset Allocation 2 — Questions and Answers
Question 1: A retiree's portfolio is 60% equities and 40% bonds. After a strong equity rally, the mix drifts to 75/25. What is the PRIMARY reason an RMA adviser would rebalance?
- To lock in equity profits before a potential correction
- To restore the risk profile aligned with the client's investment policy statement (Correct answer)
- To reduce capital gains taxes by selling appreciated shares
- To increase bond duration and capture higher yields
Correct answer: To restore the risk profile aligned with the client's investment policy statement
Rebalancing restores the portfolio to its target allocation, maintaining the risk level documented in the investment policy statement.
Question 2: Which risk measure quantifies the potential loss in a portfolio over a given time period at a specific confidence level?
- Standard deviation
- Beta
- Value at Risk (VaR) (Correct answer)
- Sharpe ratio
Correct answer: Value at Risk (VaR)
Value at Risk (VaR) expresses the maximum expected loss over a defined period at a given confidence level (e.g., 95% or 99%).
Question 3: In a Monte Carlo simulation for retirement income planning, increasing the number of simulations primarily improves which aspect of the analysis?
- The average projected portfolio balance at retirement
- The statistical reliability and convergence of probability estimates (Correct answer)
- The assumed rate of return used in each scenario
- The accuracy of Social Security benefit projections
Correct answer: The statistical reliability and convergence of probability estimates
More simulation paths reduce sampling error and produce more stable probability-of-success estimates.
Question 4: A 68-year-old client holds a large-cap growth fund with an expense ratio of 1.45% and a comparable ETF with an expense ratio of 0.05%. Over 20 years at a 7% gross return, this 1.40% difference most directly affects:
- The fund's beta relative to the S&P 500
- The net compound return available to the client (Correct answer)
- The tax treatment of dividends received
- The fund's Morningstar star rating
Correct answer: The net compound return available to the client
Expense ratios directly reduce net compound returns; a 1.40% annual drag compounded over 20 years can consume a significant portion of terminal wealth.
Question 5: The concept of 'sequence of returns risk' is MOST relevant when:
- A client is in the accumulation phase and contributing regularly
- A client begins taking systematic withdrawals from a portfolio experiencing early poor returns (Correct answer)
- Bond yields rise sharply during the first year of retirement
- A client reinvests all dividends rather than spending them
Correct answer: A client begins taking systematic withdrawals from a portfolio experiencing early poor returns
Sequence risk is most damaging when withdrawals are taken during a period of poor early returns, permanently reducing the portfolio's recovery capacity.
Question 6: Which asset allocation approach dynamically reduces equity exposure as a target date approaches, following a predetermined 'glide path'?
- Tactical asset allocation
- Life-cycle (target-date) fund strategy (Correct answer)
- Core-satellite portfolio construction
- Constant-mix rebalancing
Correct answer: Life-cycle (target-date) fund strategy
Target-date fund strategies follow a glide path that systematically shifts from growth-oriented equities toward income-oriented assets as the target date nears.
Question 7: An adviser calculates the Sharpe ratio for two retirement portfolios: Portfolio A = 0.85, Portfolio B = 0.62. What does this indicate?
- Portfolio A has a higher absolute return than Portfolio B
- Portfolio A generates more return per unit of total risk than Portfolio B (Correct answer)
- Portfolio B has lower volatility than Portfolio A
- Portfolio A has a lower maximum drawdown than Portfolio B
Correct answer: Portfolio A generates more return per unit of total risk than Portfolio B
The Sharpe ratio measures excess return per unit of standard deviation, so a higher ratio indicates better risk-adjusted performance.
RMA Investment Management & Asset Allocation 2
A retiree's portfolio is 60% equities and 40% bonds.
After a strong equity rally, the mix drifts to 75/25.
What is the PRIMARY reason an RMA adviser would rebalance?