STEP Portfolio Management & Strategy 3

Question 1

Which of the following best describes the 'Prudent Investor' standard as it applies to trust portfolio delegation?

Accepted Answer

Trustees may delegate investment management if they exercise care in selecting and supervising the agent

Answer

Under the UPIA, trustees may delegate investment functions to agents, but must exercise prudence in selecting, establishing scope for, and monitoring the delegated agent.

Question 2

A trustee is evaluating whether to invest trust assets in private equity. Which factor is MOST important from a fiduciary perspective before making this allocation?

Accepted Answer

Whether the investment's illiquidity and risk are appropriate given the trust's distribution needs

Answer

Private equity's illiquidity and risk profile must be evaluated in the context of the trust's specific distribution requirements and overall investment strategy before allocation.

Question 3

In portfolio management, 'duration' is primarily used to measure a bond portfolio's sensitivity to:

Accepted Answer

Interest rate changes

Answer

Duration measures the sensitivity of a bond's price to changes in interest rates; a higher duration indicates greater price volatility for a given interest rate change.

Question 4

A trust portfolio includes both US equities and international bonds denominated in foreign currencies. The trustee wants to reduce currency exposure without liquidating positions. The appropriate strategy is:

Accepted Answer

Use currency forward contracts or currency hedges to offset foreign exchange risk

Answer

Currency forward contracts or hedging instruments allow the trustee to reduce foreign exchange exposure while maintaining the desired portfolio composition.

Question 5

Which portfolio construction concept states that combining assets with low or negative correlations reduces overall portfolio risk?

Accepted Answer

Modern Portfolio Theory (MPT)

Answer

Modern Portfolio Theory, developed by Markowitz, demonstrates that combining assets with low or negative correlations can reduce portfolio risk without sacrificing expected return.

(STEP) Society of Trust and Estate Practitioners Certification Practice Test

(STEP) Society of Trust and Estate Practitioners Certification Practice Test

STEP Portfolio Management & Strategy 3