WMS Investment Strategies and Portfolio Management 2 — Questions and Answers
Question 1: Which portfolio rebalancing trigger method sets fixed percentage deviation thresholds before rebalancing occurs?
- Calendar rebalancing
- Threshold rebalancing (Correct answer)
- Tactical rebalancing
- Opportunistic rebalancing
Correct answer: Threshold rebalancing
Threshold rebalancing triggers a rebalance when an asset class drifts beyond a specified percentage from its target allocation.
Question 2: A portfolio with a beta of 1.3 is expected to move how relative to the market during a 10% market decline?
- Down 7.7%
- Down 10%
- Down 13% (Correct answer)
- Down 3%
Correct answer: Down 13%
Beta measures systematic risk; a beta of 1.3 means the portfolio is expected to move 1.3 times the market's movement, so a 10% decline becomes a 13% decline.
Question 3: What is the primary goal of a liability-driven investment (LDI) strategy?
- Maximize total return relative to a benchmark
- Match or exceed the growth of future liabilities (Correct answer)
- Minimize taxes on investment income
- Achieve superior risk-adjusted returns
Correct answer: Match or exceed the growth of future liabilities
LDI strategies are designed to match or fund future liabilities, commonly used by pension funds to align assets with their obligation streams.
Question 4: Which factor in the Fama-French Three-Factor Model explains the return premium of small-cap stocks over large-cap stocks?
- HML (High Minus Low)
- SMB (Small Minus Big) (Correct answer)
- Momentum factor
- Market risk premium
Correct answer: SMB (Small Minus Big)
The SMB factor captures the historical excess return of small-capitalization stocks over large-capitalization stocks.
Question 5: An investor sells a losing position to realize a tax loss and immediately purchases a substantially identical security. What IRS rule is violated?
- Step-up basis rule
- Wash-sale rule (Correct answer)
- Constructive sale rule
- Short-against-the-box rule
Correct answer: Wash-sale rule
The wash-sale rule disallows a tax loss if a substantially identical security is purchased within 30 days before or after the sale.
Question 6: In a core-satellite portfolio construction approach, what role does the 'satellite' portion typically serve?
- Provide broad market exposure at low cost
- Generate alpha through active or alternative strategies (Correct answer)
- Hedge currency risk in international holdings
- Hold cash equivalents for liquidity needs
Correct answer: Generate alpha through active or alternative strategies
The satellite portion uses active management or alternative investments to seek excess returns (alpha) beyond the core passive holdings.
Question 7: Which measure divides the portfolio's excess return over the risk-free rate by its total standard deviation?
- Treynor ratio
- Jensen's alpha
- Sharpe ratio (Correct answer)
- Information ratio
Correct answer: Sharpe ratio
The Sharpe ratio uses total standard deviation (systematic plus unsystematic risk) as its risk measure, unlike the Treynor ratio which uses beta.
WMS Investment Strategies and Portfolio Management 2
Which portfolio rebalancing trigger method sets fixed percentage deviation thresholds before rebalancing occurs?